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Mortgage Industry Regulation ‘All in One Guide’ including

National Consumer Credit Protection Act Manual

Last updated 6 April 2010

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About this Manual

This manual has been prepared by the MFAA and Gadens Lawyers for the assistance of MFAA members. This document does not comprise legal advice and neither the MFAA nor Gadens Lawyers accept any responsibility for it. Gadens Lawyers and the MFAA asserts copyright in respect of this work.

This Manual covers:

the National Consumer Credit Protection Act 2009 (NCCP Act)

the National Credit Code (NCC)

other laws and codes impacting on the mortgage industry.

Although this manual covers a lot of ground, it does not claim to deal with all relevant laws and codes. You should obtain legal advice on specific issues.

This manual will be updated as more information comes to hand and as laws and commercial practice changes. The manual was last updated on the date specified on the cover sheet.

How to use this Manual

You can access each of the items listed below by clicking on the relevant link.

If your main interest is the NCCP, the first ten parts will be most relevant to you.

Part 1 – Overview of the Commonwealth regulation of credit

Part 2 - Broker’s Action List – what do I need to do now?

Part 3 - Lender’s Action List – what do I need to do now?

Part 4 – Getting registered and licensed. Appointing credit representatives

Part 5 – Assessing whether a loan is unsuitable

Part 6 - Mortgage Managers and non-balance sheet lenders

Part 7- Disclosures

Part 8 – NCCP – Information about some provisions

Part 9 – Summary of key provisions - NCCP and associated legislation and regulations

Part 10 – Example documents

AML identification form

Appointment of credit representative - company

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Appointment of credit representative - individual

Compliance Plan for small businesses – comprises a check list (required from when licence applied for)

Credit assessment report (required from 1 January 2011)

Credit Guide, Quote, and Credit Proposal Documents (required from 1 January 2011)

Declaration by directors and secretaries of companies applying for registration

IDR Procedures (required from when licence applied for)

NCCP Charter

National Finance Broking Contract (for use to 1 January 2011)

Policy to ensure clients are not disadvantaged by any conflict of interest

Privacy consent – brokers

Privacy consent – managers

Privacy consent – lenders

Registration Checklist

Part 11 – Other laws including state laws applying to finance brokers

Part 12 – Door to door sales legislation

Part 13 – The Hawking Prohibitions in the Corporations Act

Part 14 – The eMarketing Code of Practice

Part 15 – Financial Sector (Collection of Data) Act

Part 16 – Australian Financial Services Licences

Part 17 – Privacy Act Module

Part 18 – Workplace Relations

Part 19 - Anti-Money laundering / Counter Terrorism Financing Act

Part 20 – ASIC regulation of debt collection under the ASIC Act

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Part 1. Overview of the Commonwealth Regulation of Credit

1.1 Two phase implementation

In 2008, the Council of Australian Government (COAG) agreed that the Commonwealth Government should take over responsibility for the regulation of consumer credit. Under these proposals, ASIC becomes the national regulator for consumer credit and finance broking.

The proposals are to be implemented in two phases.

Phase 1

1 April 2010 – 30 June 2010

Registration period.

CAUTION: If you fail to register by 30 June 2010, you cannot conduct a credit activity business unless and until you are licensed (unless you are appointed as a credit representative)!! Licensing could take time.

CAUTION: ASIC encourages early registration. If you apply for registration after 18 June 2010, ASIC says it may not be able to approve your application by 30 June 2010 and you will need to cease trading until you receive a licence (or are appointed as a credit representative) – see RG202

1 July 2010

The National Consumer Credit Protection Act (NCCP) commences in part.

The Uniform Consumer Credit Code (UCCC) is replaced with the National Credit Code (NCC). The NCC extends regulated loans to include loans to individuals in relation to residential investment properties.

Only registered businesses can conduct the business of ‘credit activities’ (eg lending, leasing, and broking).

Applications for licences must be made by 31 December 2010 or registration will lapse.

Brokers and lenders who are not authorised deposit taking institutions (ADIs) or registered financial corporations (RFCs) must ensure they do not make or arrange an unsuitable loan, loan increase, or lease.

Mandatory membership of an external dispute resolution body (EDR) for registered/licensed businesses and for credit representatives.

CAUTION: If you do not apply for a licence by 31 December 2010, you cannot conduct a credit activity business unless and until you are licensed (unless you are appointed as a credit representative)!! Licensing could take time. Registration only applies to businesses involved with NCC regulated loans and leases.

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1 January 2011

Responsible lending provisions commence for ADIs and RFCs. Other responsible lending obligations commence including providing: * credit guides by lenders and brokers * quotes and credit proposal disclosure documents by brokers * copies of credit assessments on request by lenders if loans are made or

principal increased, and by brokers if credit assistance is provided

Businesses must cease to trade unless they have applied for or obtained a licence, or been appointed as a credit representative. New businesses will be unable to conduct business until they obtain a licence which could involve some delay.

CAUTION: If you fail are not licensed by 30 June 2011, you cannot conduct a credit activity business unless and until you are licensed (unless you are appointed as a credit representative)!! Licensing could take time. Licensing only applies to businesses involved with NCC regulated loans and leases.

Phase 2 – during 2010 and 2011

Review ‘unfavourable lending practices’ such as credit card limit extension offers and other fringe lending issues (micro lending)

Review regulation of credit for small businesses

Review regulation of investment loans other than margin loans and loans for residential investment properties

Review mandatory comparison rates

Review regulation and tailored disclosure of reverse mortgages

Review Islamic loans / finance

Review exemption for state licensed credit providers

Review exemption for point of sale credit

1.2 Registration

Businesses can register between 1 April 2010 and 30 June 2010. Businesses which are not registered by 30 June 2010 will be unable to conduct ‘credit activity’ business until they are registered, which could involve a significant delay.

Registering is expected to be a simple on line process.

Companies can be registered. A company’s employees and directors automatically become the company’s representatives. However, employees and directors of credit representatives are not automatically authorised and must themselves be appointed a credit representative.

Registered businesses can appoint companies or individuals as credit representatives at any time after the business is registered. Each credit representative is given an unique number

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which stays with the credit representative even though the credit representative swaps to another registered business or licensee.

To be registered a person must:

make an application to ASIC

make a statement that the applicant is a member of an approved external dispute resolution (EDR) scheme

state in respect of the applicant and each director and secretary of a company applicant that they are not banned or disqualified etc.

There are no insurance, IDR, or education requirements to achieve registration.

A registered business must:

(a) conduct business efficiently, honestly, and fairly

(b) comply with any conditions imposed on their registration

(c) comply with all credit legislation

(d) take reasonable steps to ensure its representatives (this includes employees as well as credit representatives) comply with all credit legislation

(e) ensure clients are not disadvantaged by any conflict of interest of the person or its representatives

(f) comply with any other obligations prescribed by the regulations

CAUTION: You will need strategies (and probably a written policy) to ensure compliance with the requirement that clients are not disadvantaged by any conflict of interest.

1.3 Licensing

The licence is called an Australian Credit Licence.

Companies can be licensed. A company’s employees and directors automatically become the company’s representatives.

Licensed businesses can appoint companies or individuals as credit representatives. Each credit representative is given an unique number which stays with the credit representative even though the credit representative swaps to another licensee or registered business. .

Licensees must in addition to the requirements imposed on registered businesses:

be issued with an unique ACL number which must be shown on certain documents

have an internal dispute resolution process (IDR) – this requirement does not apply during the registration period

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be a member of an ASIC approved EDR. The key schemes are the Credit Ombudsman Service Limited (COSL) and the Financial Ombudsman Service (FOS)

hold PI insurance complying with ASIC’s requirements – see RG210 expected to be released on 29 March 2010 (not required for registration)

meet education and experience qualifications (not required for registration)

1.4 Representatives and credit representatives

There is a difference between a representative and a credit representative.

Registered or licensed businesses may operate through their own staff and directors. These internal representatives do not need separate licenses and do not need to be appointed as a credit representative or join an EDR. They are one type of representative.

Registered or licensed businesses may also appoint third parties as credit representatives to ‘engage in specified credit activities on behalf of the licensee’. Credit representatives are another type of representative. Employees and directors of corporate credit representatives are not automatically authorised.

Credit representatives must:

be a member of an EDR scheme unless they are an employee or director of a credit representative which is an EDR member

not be subject to a banning or disqualification order (applies to directors, secretaries, and senior managers of a company which is appointed as a credit representative)

not have been convicted within the last 10 years of serious fraud

Although ASIC has not made a final decision when this manual was prepared, it is expected that credit representatives may be:

covered by the licensee’s insurance; or

the licensee and each credit representative has their own insurance

1.5 Not make or arrange an unsuitable loan or lease

These provisions apply from 1 July 2010 to all lenders and credit assistants (brokers) other than ADIs and RFCs. These provisions commence for ADIs and RFCs on 1 January 2011.

These obligations can be summarised in the ‘NCCP Charter’

THE NCCP CHARTER

I will not make or arrange a loan or principal increase that is unsuitable.

A loan or principal increase will be unsuitable if:

(a) the borrower could not repay or could only repay with substantial hardship; or

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(b) the loan will not meet the borrower’s objectives having regard to (amongst other

things) the loan type, term, interest rate, repayment, fees and charges, and special conditions.

To make that assessment, I will

(a) make reasonable enquiries about the borrower’s requirements and objectives

(b) make reasonable enquiries about the borrower’s financial situation; and

(c) take reasonable steps to verify that financial information.

If the borrower can only repay by selling their principal place of residence, the loan will be unsuitable unless the contrary is proved.

Brokers will make the assessment no longer than 90 days before assistance is provided (ie the loan is arranged). Lenders will make the assessment no longer than 90 days before the credit contract is entered or principal increased (120 days if the loan is to purchase residential property and is secured by a mortgage over the property).

In addition, from 1 January 2011, all lenders and brokers must supply a copy of the assessment upon request by the borrower. A copy of the assessment need only be supplied if:

in the case of lenders, the loan is made or increased

in the case of brokers, if credit assistance is provided. This means a copy of the broker’s preliminary assessment may be required to be provided even if a loan is not made or increased. Credit assistance occurs when a person:

suggests the consumer apply for a loan, an increase to a loan, or a lease with a particular credit provider

suggests the consumer stay with an existing lender or lessor

assists the consumer apply for a loan, an increase to a loan, or a lease with a particular credit provider.

1.6 Credit guides, quotes, and credit proposal disclosure documents

From 1 January 2011, licensees must provide a credit guide setting out details of:

their services; and

for credit assistants, the commissions they may receive and the fees the borrower must pay.

Credit assistants (but not lenders) must also provide:

a quote for any fees or charges payable by the borrower

a credit proposal

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Part 2. Broker’s Action List

Date Action

Now Review all finance broking contracts (FBC) and other pro forma agreements with consumers to ensure they include no unfair contract terms. Unfair contract terms are void. The Victorian Fair Trading Act 1999 applies now, and soon Commonwealth law will make unfair contract terms void.

You must continue to use an FBC until the credit guide provisions commence on 1 January 2011.

Now Attend training sessions so you become familiar with the new law.

Read this manual.

Now Ensure that your directors, company secretaries, and partners are not ineligible. [See list of ineligible criteria at the end of this table]

By 1 May 2010

Determine whether your aggregator or lender (if any) will require you to obtain your own licence, or will appoint you as a credit representative. Decide whether you are happy to be a credit representative, or would prefer to be licensed.

If you are an aggregator or large intermediary, decide whether you will require your loan writers to be licensed or will appoint credit representatives. There is no reason why you can’t have a mix of both, but businesses which are licensed cannot be appointed as credit representatives.

Some aggregators and large businesses may delay making a decision about whether to appoint credit representatives until more information is known. In that case, all members should be registered. They can easily obtain registration, and if it is later decided to appoint them as credit representatives, they can cancel their registration at the same as they are appointed as credit representatives (ensure this is no timing gap).

1 April 2010 – 30 June 2010

Unless you will be a credit representative, obtain registration with ASIC.

To obtain registration you will need to:

(a) make an application to ASIC

(b) be a member of an ASIC approved external dispute resolution scheme

(c) state in respect of the applicant and each director and secretary of a company of an applicant that they are not banned or disqualified etc.

Care must be exercised to identify each legal entity which needs to be registered. In some corporate groups more than one entity may need to be registered. It is possible for a registered entity to appoint other companies and individuals as their credit representative.

ASIC will provide useful information to assist registration and this task should not be complex. You should be able to do this yourself, unless you run a large business

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Date Action

where special advice may be required. The trick is ensuring you register all the correct entities.

If you will be appointed a credit representative, ensure your appointer is registered and has appointed you a credit representative.

If you operate through a company, your company will need to be appointed as a credit representative and you will need also need to be appointed a credit representative (which can be direct from the licensee in which case both your company and you need an EDR membership, or by way of authorisation by your company with the consent of the licensee in which case if you are an employee or director you will be covered by your company’s ER membership.

CAUTION: Any entity not registered by 30 June 2010 will be banned from trading until it obtains a license.

The penalty for conducting business if you are not registered or appointed as a credit representative is a civil penalty of up to $1.1m and a criminal penalty of up to $22,000 or 2 years imprisonment!

30 June 2010 CAUTION: Ensure all the other businesses you deal with who are conducting a credit activity are registered, licensed, or a credit representative.

This is important because the NCCP provides that a licensee (registrant) must not engage in a credit activity with another person who should be licensed (registered) or a credit representative but is not.

The penalty for dealing with an unauthorised person is a civil penalty of up to $1.1m and a criminal penalty of up to $22,000 or 2 years imprisonment!

1 July 2010 The National Credit Code replaces the UCCC.

Loans to purchase renovate or improve residential investment real estate (includes vacant land on which a dwelling is intended to be built) and refinancing of those loans will be regulated by the NCC.

A new business purpose declaration needs to be used.

Application for hardship and postponement of enforcement can be made in respect of loans made after 1 July 2010 where the principal sum is $500,000 or less.

1 July 2010 From this date, you must not arrange an unsuitable loan, nor recommend that a borrower remain in an unsuitable loan. Do you have appropriate procedures and check lists to enable compliance? (ADIs and RFCs are exempt from this requirement)

See the MFAA’s NCCP Charter at paragraph 1.5. Read Part 5 of this Manual –Assessing whether a loan is unsuitable

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Date Action

1 July 2010 – 31 December 2010

Unless you are a credit representative, apply for an Australian Credit Licence.

To obtain a licence, you will need in addition to the requirements to become registered:

an internal dispute resolution process (IDR)

have compensation arrangements in place as specified in the regulations. (PI insurance – yet to be finalised)

have systems and a written compliance plan

have an adequate financial and human resources and risk management plan

The MFAA will be providing example documents – see Part 10 Example Documents.

CAUTION: Any entity not registered by 30 June 2010 and which has not applied for a licence by 31 December 2010 will be banned from trading until it obtains a license.

1 July 2010 – 31 December 2010

Develop procedures and documents to enable compliance with the disclosure requirements commencing on 1 January 2011 (see below). The MFAA will be providing example documents – see Part 10 Example Documents.

1 January 2011

Unsuitable loan provisions commence for ADIs and RFCs.

Disclosure provisions apply for all. You will need to give borrowers

credit guides

quotes

credit proposal disclosure documents; and

on request a copy of the credit assessment if you provided credit assistance

The MFAA will be providing example documents – see Part 10 Example Documents.

30 June 2011 All businesses conducting credit activities must be licensed unless they are exempt or appointed as a credit representative of a licensee.

CAUTION: Any entity not licensed by 30 June 2011 will be banned from trading until it obtains a license.

CAUTION: Ensure all the other businesses you deal with who are conducting a credit activity are licensed or a credit representative.

Disqualification criteria

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The directors, company secretaries, and partners of a registered entity must not fall into any one or more the following classes:

(a) a banning order or disqualification order under Part 2-4 of the National Credit Act is in force against the person

(b) a banning order or disqualification order under Division 8 of Part 7.6 of the Corporations Act 2001 is in force against 4 the person

(c) the person is banned from engaging in a credit activity under a law of a State or Territory

(d) if the person is or has been registered—the person’s registration is either suspended or cancelled

(e) an Australian financial services licence of the person is either suspended, or has been cancelled within the last 7 years, under:

(i) paragraph 915B(1)(d) or subparagraph 915B(4)(b)(iii) of the Corporations Act 2001 (which deals with suspension or cancellation because of mental or physical incapacity); or

(ii) section 915C of the Corporations Act 2001 (which deals with suspension or cancellation after offering a hearing)

(f) if the person is the trustees of a trust—the person is insolvent; and

(g) if the person is a natural person:

(i) the person is disqualified from managing corporations under Part 2D.6 of the Corporations Act 24 2001

(ii) the person has been convicted, within 10 years before the application is made, of serious fraud

(iii) a prescribed State or Territory order is in force against the person.

In any event under s12(3), ASIC may refuse to register a person if ASIC has reason to believe that:

(a) the application is false in a material particular or materially misleading; or

(b) there is an omission of a material matter from the application.

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PART 3. Lender’s Action List

Date Action

Now Read Part 2 - Brokers Action List. Most of those steps will apply to you. In addition, you need to take the steps in this table.

Mortgage managers and servicers are generally treated as intermediaries (also called credit assistants) and so must comply with all the requirements for brokers. If you organise a loan program, you need to take the steps in this table.

Whether trustees and other SPVs will require to be registered and subsequently licensed is not known when this table was prepared.

Now Review all credit contracts, mortgages, guarantees, and other pro forma agreements with consumers to ensure they include no unfair contract terms. The Victorian Fair Trading Act 1999 already applies, and soon Commonwealth law will make unfair contract terms void.

Now Review procedures for the new EDR rules commencing on or about 1 January 2010.

FOS + COSL rules provide:

if a dispute has been referred to EDR, the lender cannot commence proceedings until the dispute is determined (existing)

once proceedings have been commenced, if a matter is referred to EDR, you must cease proceedings unless:

(a) judgment has been signed; or

(b) the customer has filed a defence and taken a further step in the proceedings (eg pre-trial conference)

Already about 70% of COSL's cases are hardship applications referred to EDR after proceedings have been commenced. This has not caused great inconvenience or injustice. The EDRs will hopefully act promptly to ensure that there is a genuine short or medium term hardship issue to be resolved.

The background is that many borrowers ignore recovery action until they are served with court process. It is only at that stage that they realise that the issue is serious.

By 30 June 2010

Consider whether any credit policies need amendment because of the extension of the UCCC/NCC to residential investment loans.

Amend documents and procedures to comply with the NCC which starts on 1 July 2010.

Develop a policy for identifying unsuitable loans – unless you are an exempt ADI or RFC.

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Date Action

30 June 2010 Ensure all the other businesses you deal with who are conducting a credit activity are registered or a credit representative. Each lender will need its own registration and licence because a lender cannot operate as a credit representative because a lender is acting as a principal and not on behalf of another licensee. However, mortgage managers can operate as a credit representative.

This is important because the NCCP provides that a licensee (registrant) must not engage in a credit activity with another person who should be licensed (registered) or a credit representative but is not.

The penalty for dealing with an unauthorised person is a civil penalty of up to $1.1m and a criminal penalty of up to $22,000 or 2 years imprisonment!

1 July 2010 The National Credit Code replaces the UCCC.

Loans to purchase renovate or improve residential investment real estate (includes vacant land on which a dwelling is intended to be built) and refinancing of those loans will be regulated by the NCC.

New business purpose declarations and default notices must be used.

1 July 2010 From this date, you must not make or increase an unsuitable loan. Do you have appropriate procedures and check lists to enable compliance? (ADIs and RFCs are exempt from this requirement.)

1 January 2011

Unsuitable loan provisions commence for ADIs and RFCs.

Disclosure provisions apply for all. You will need to give borrowers credit guides, and upon request a copy of your assessment if the loan is made or principal increased.

Disclosure requirements for managers were not known when this table was prepared.

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Part 4. Getting Registered and Licensed - Appointing Credit

Representatives

Part 4A. Who needs to be licensed?

4.1 Who needs to be registered or licensed?

Persons conducting a credit activity need to be registered and subsequently licensed.

To fall within the NCCP, the credit activity must relate to credit (including consumer leases) regulated by the National Credit Code, which replaces the old Uniform Consumer Credit Code (UCCC) on 1 July 2010. Remember that the NCC is extended to include loans to individuals and strata corporations predominantly to purchase, renovate or improve real estate used predominantly residential property investment purposes and refinancing those loans.

A person engages in a credit activity if in relation to NCC regulated credit or leases it:

makes loans or exercises the rights of a lender (including recovery)

provides credit assistance or acts as an intermediary

is a lessor of a consumer lease or exercises the rights of the lessor, including recovery

has the benefit of a mortgage or guarantee taken to secure a loan

4.2 What is credit assistance?

A person provides credit assistance when the person carrying on business in Australia:

suggests that a consumer apply for a loan, an increase to a loan, or a lease

suggests the consumer stay with an existing lender or lessor

assists the consumer apply for a loan, an increase to a loan, or a lease – see s8 NCCP

It will be seen that this definition is quite specific. It does not extend to all the ‘customer care’ activities an intermediary might undertake such as assisting a borrower to arrange a loan settlement. Rather, the activity focuses on the selection of a credit product and obtaining an approval for the credit product.

Accordingly, many businesses involved in the finance industry will not be providing credit assistance, and so will not be obliged to comply with the obligations imposed on credit assistants (such as not arranging an unsuitable loan or providing a credit guide). However, these businesses may still need to be licensed or be a credit representative because they are either:

exercising the rights of a lender, lessor, mortgagee, or guarantee holder; or

acting as an intermediary.

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4.3 Acting as an intermediary

A person acts as an intermediary if a person carrying on a business in Australia acts an intermediary (directly or indirectly) between the consumer and the lender or lessor – see s9 NCCP. This captures entities such as aggregators, mortgage managers and mortgage services.

If a loan or a lease is legally assigned so that the lender/lessor of record becomes the assignee, the assignee will be conducting a credit activity and will need to be licensed – see s10 NCCP. This captures changes to the lender/mortgagee of record, but will not catch beneficial assignments involved in securitisation.

4.4 Debt collectors, managers, and servicers

Debt collectors, managers, and servicers who are solely involved in servicing do not provide a ‘credit service’, because a ‘credit service’ means arranging loans, increases in loans, or leases. Rather, they are obliged to obtain a licence principally because of Item 1 and 3 of s 6 NCCP Act.

Item 1 of s 6 NCCP Act provides that ‘credit contracts’ includes a business which ‘performs the obligations or exercises the rights of a credit provider’. However, this does not mean that a debt collector, manager, or servicer is a credit provider.

Similarly, a business which ‘performs the obligations or exercises the rights’ described in Item 3, 4, and 5 regarding consumer leases, mortgages, and guarantees respectively does not thereby become a lessor, mortgagee, or lender.

4.5 Exemptions from licensing

The NCCP Regulations provide for a number of exemptions, including:

debt collectors who are licensed or registered under the State or Territory law

point of sale credit providers (for example when a supplier of goods arranges credit, but only if the credit is to buy the goods)

lawyers conducting their usual business

a clerk or cashier (eg simply handing over documents or providing administrative activities)

mere referrers who disclose their commission

The exemption of mere referrers is controversial as the referrer is only exempted from licensing if the referrer discloses commission. However, referrers who are not in the loan industry won’t know about this law. Licensees need to be careful because if they pay a commission to someone who fails to disclose the commission the result is that the licensee is dealing with someone who should be licensed but isn’t. It is an offence for a licensed person to conduct credit activities with someone who should be licensed but isn’t.

4.6 Private lenders

The NCC only applies to regulated loans if ‘the credit provider provides the credit in the course of a business of providing credit carried on in Australia or as part of or incidentally to any other business of the credit provider carried on in Australia’.

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This means that a person who is not in ‘business’ but occasionally makes loans, those loans won’t be regulated by the NCC even though the loans would otherwise be regulated. It will be a question of fact whether the frequency with which loans are made amounts to conducting a business.

On the other hand, if a business makes a loan incidental to its business (ie even a one off loan) then it is likely that the loan will be regulated and a licence will be needed to make the loan. This could prevent businesses from making occasional one off loans to associates or friends because of the need to obtain a licence to do so.

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Part 4B. Registration

4.7 Getting registered

The registration process should be reasonably easy. The MFAA expects ASIC to provide easy online registration with prompts to assist the process. Small businesses should be able to complete registration without external help.

Read Part 2 - Broker’s Action List

to see the requirements for registration.

CAUTION Any entity not registered by 30 June 2010 will be banned from trading until it obtains a licence. Registration only applies to businesses involved with NCC regulated loans and leases.

A registered business must:

conduct business efficiently, honestly, and fairly

comply with any conditions imposed on their registration

comply with all credit legislation

take reasonable steps to ensure its representatives (this includes employees as well as credit representatives) comply with all credit legislation

ensure clients are not disadvantaged by any conflict of interest of the person or its representatives

comply with any other obligations prescribed by the regulations [nothing proposed to be prescribed yet]

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Part 4C. Appointing credit representatives

4.8 Appointing Credit Representatives

Once you are registered, you can commence appointing credit representatives. You can do this both before and after 1 July 2010.

Remember, that there is no need to appoint your directors or your employees as they are automatically your representatives. However, directors and employees of credit representatives are not authorised by the appointment of their company as a credit representative.

If you want to appoint external third parties as credit representatives, you must:

check that the credit representative is eligible – see below

appoint the credit representative in writing (ASIC may provide a pro forma appointment, and if they don’t, the MFAA will)

notify ASIC of the appointment (expected to be no fee and an easy on-line form)

You can appoint individuals (ie human beings) and companies as your credit representative as soon as you are registered. See Part 10 – Example Documents

for a form of appointment of credit representative.

Representatives of licensees

Directors and employees (but not secretaries) of licensees are automatically representatives authorised to undertake credit activities on behalf of the licensee. There is no need for any further formal appointment or notification to ASIC.

For the technically minded, this derives from s29(3) NCCP Act, which provides that employees or directors of a licensee or a related corporation of the licensee don’t need a licence to act on behalf of the licensee.

Appointment of credit representatives

However, when a company is appointed as a credit representative, the directors, and employees of the credit representative company are not authorised to conduct credit activities.

Directors, employees, and any subcontractors of a credit representative company need to be sub-authorised by the corporate credit representative. The corporate credit representative requires consent from the licensee to do this. Only natural persons can be sub-authorised. The sub-authorised credit representatives become credit representatives of the licensee and not of the credit representative.

If a subcontractor loan writer of the credit representative operates through a company, the licensee will need to appoint the corporate subcontractor directly as credit representatives can’t sub-authorise companies.

Instead of the credit representative sub-authorising its directors, employees, and any subcontractors, a licensee could appoint those people directly. Licensees may prefer to keep control over the appointment of credit representatives by not consenting to any sub-authorisations and appointing all credit representatives directly.

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Sub-authorised directors and employees of a credit representative company can rely on the company’s EDR membership. However, contractors who are sub-authorised will need their own EDR membership. This derives from section 65(6) of the NCCP Act, which provides that a sub-authorisation is void unless the natural person is a member of an EDR scheme. However, regulation 16 of the NCCP Regulations adds the proviso that the natural person doesn’t need to be a member of an EDR scheme if the natural person is an employee or director of the credit representative.

Although ASIC has not yet made its final decision in relation to PI insurance, it appears that credit representatives (including sub-authorised credit representatives) could be covered by the licensee’s PI insurance, or a combination of the licensee’s insurance and separate insurance affected by each credit representative.

ASIC allocates credit representatives a unique credit representative number. That stays with the credit representative even if they change licensees.

You must notify ASIC of appointments of credit representatives within 15 business days of the appointment and notify ASIC of any change of details or revocations within 10 business days of the change – see s71 NCCP. The licensee is responsible for notifying ASIC about appointments and variations to credit representatives directly appointed, but the credit representative company is responsible for notifying ASIC of appointments and changes to sub-authorised credit representative.

CAUTION Civil penalty $220,000 or $1,100,000 for companies and multiple trustees Criminal penalty $2,750 or 6 months imprisonment for failure to notify these changes within the time limits

4.9 Liability for Credit Representatives

You will be liable to the client for the conduct of your credit representatives – s78(3) NCCP.

If the credit representatives operate under your brand, the fact that you are now liable under the NCCP to the client for their conduct may add little liability as the client will look to you in any event. However, if the credit representatives trade under their own name, you are taking on a significant new liability by being responsible for their conduct to borrowers.

Irrespective of whether credit representatives uses your brand, you are not liable to ASIC or the courts for breaches of the NCCP by the credit representative. However, you may be subject to significant criticism if you have not had an appropriate compliance plan and have not properly monitored the conduct of your credit representatives.

Representatives may indemnify licensees, and licensees may indemnify other licensees for the conduct of their credit representatives – see s78(6) NCCP. A form of indemnity is included in the example Appointment of Credit Representative provided in Part 10 of this manual.

4.10 Eligibility of Credit Representatives

A credit representative may be appointed in respect of some or all of a licensee’s credit activities.

A credit representative must:

be a member of an EDR scheme

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not be subject to a banning or disqualification order (and if a company is appointed as a credit representative its directors, secretaries, and senior managers must not be subject to a banning or disqualification order)

not have been convicted within the last 10 years of serious fraud – see s.64(4) NCCP

A person can be the credit representative of two or more licensees so long as the licensees consent or are related body corporates – see s 66 NCCP.

A licensee can’t appoint another licensee as a credit representative – see s 67 NCCP.

Care must be exercised when appointing a credit representative as it is an offence to appoint an ineligible person – see s69 NCCP.

CAUTION Civil penalty $220,000 or $1,100,000 for companies and multiple trustees Criminal penalty $11,000 or 2 years imprisonment or both

4.11 Sub-authorisation of Credit Representatives

With the consent of the licensee, a credit representative that is a company may authorise one or more natural persons (but not companies) to be a credit representative of the licensee. The natural persons must:

be a member of an EDR scheme unless the credit representative is a director or employee of a company which has been appointed as a credit representative – see reg 16 NCCP Regulations

not be subject to a banning or disqualification order

not have been convicted within the last 10 years of serious fraud – see s 65

A person so sub-authorised becomes a credit representative of the licensee, and not a credit representative of the credit representative making the sub-authorisation.

4.12 Information about representatives

The term representative includes directors, employees, and credit representatives.

ASIC can tell licensees information about a proposed or existing representative. Licensees must only use that information to decide what action (if any) to take in relation to that representative – see s 73 NCCP.

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Part 4D. Getting a licence

4.13 Getting a licence

CAUTION Any entity not registered by 30 June 2010 and which has not applied for a licence by 31 December 2010 will be banned from trading until it obtains a licence. Licensing only applies to businesses involved with NCC regulated loans and leases.

CAUTION Ensure all other business you deal with, who are conducting a credit activity are registered, a licensee, or a credit representative

In order to get your licence you will need to provide some information to ASIC which was not required for registration.

To obtain a licence, in addition to the requirements to become registered you will need:

an internal dispute resolution process (IDR). ASIC guidance regarding the requirements for IDR had not been published when this manual was prepared. It is hoped these guides will allow for small one or two person businesses where true independence will be difficult to arrange.

compensation arrangements in place as specified in the regulations. The compensation arrangements are expected to comprise professional indemnity insurance. Lenders and lessors are likely to be exempt. The requirements for PI insurance are not yet finalised. ASIC expects to release its requirements in a regulatory guide RG210 on or about 29 March 2010.

systems and a written compliance plan. The MFAA will be providing example documents – see Part 10 Example Documents.

A director or senior manager is required to have oversight of the compliance program.

adequate financial and human resources and a risk management plan. The MFAA will be providing example documents – see Part 10 Example Documents.

There are streamlined procedures for ADIs and holders of WA A and B class brokers licenses.

Each licensee will have a unique ACL number. If the person holds an Australian Financial Services Licence (AFSL), the ACL will be the same number as the person’s AFSL.

The requirements for a registered business must continue to be observed. A registered business must:

conduct business efficiently, honestly, and fairly

comply with any conditions imposed on their registration

comply with all credit legislation

take reasonable steps to ensure its representatives (this includes employees as well as credit representatives) comply with all credit legislation

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ensure clients are not disadvantaged by any conflict of interest of the person or its representatives

comply with any other obligations prescribed by the regulations [nothing proposed to be prescribed yet]

4.14 Directors will no longer need a licence in their own name.

The NCCP licensing regime differs from the WA regime in relation to licensing companies and individuals. Under the current WA regime, a small broker who operates through a family company usually needs to hold a licence for both the company and personally. Under the NCCP, the company will be licensed, and any directors will be 'representatives' of that company without the need for any further licensing. However, employees and directors of companies which are appointed credit representatives are not automatically authorised – see para 4.7 above.

There are two terms:

'credit representatives' which are third party contractors appointed to be the credit representative of a licensee – s64; and

'representatives' which includes directors and employees to a company, as well as credit representatives –s5.

4.15 RG 204 – Applying for and varying a credit licence

ASIC has released RG204 which provides guidance on applying for and varying a credit licence. A summary of the key messages from RG204 appears in the following table.

What do I need to do before I start my on-line application? – see para RG204.41

1. Type of credit activities

Think about the type of credit activities you will engage in as part of your business because you need to select between:

(a) engage in credit activities other than as a credit provider or lessor;

(b) engage in credit activities as a credit provider or lessor; or

(c) engage in all credit activities.

ASIC encourages applicants only to choose the authorisation that is necessary to cover the credit activities you propose to engage in. Subsequent variation to licenses are allowed if your business change at a later date.

Only lenders/lessors of record or assignees of the lender/lessor’s rights should register under category (b). Managers and servicers are not the actual credit provider, and they should select category (a).

Section 6 of the NCCP Act describes ‘credit contract’ as a category of credit activity. Exercising the rights of a credit provider are included in that category. However, the

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description of ‘credit contract’ in s 6 is not relevant for the purpose of selecting the type of authorisation. Rather, the authorisation categories focuses on whether you are a credit provider or lessor, rather than whether your credit activities fall within the s 6 category of ‘credit contracts’

Some applicants may want to cover the field by selecting (c). ASIC may refuse to grant a licence if it considers that authorisation is too wide for your business.

2. Background checks on key people

Do background checks on your “fit and proper people” because you will need to provide to ASIC the following reports as supporting information to your application:

educational qualifications and previous employers (where relevant);

police check (not more than 12 months old);

bankruptcy check (not more than 12 months old or a statutory declaration for overseas people);

credit history report (not more than 3 months old).

These time limits apply from the time you lodge your licence application.

3. ASIC registers

Ensure that all information about your company recorded at ASIC is up to date. As the streamlined online process will pre-populate this information, if it is incorrect your application cannot be completed until it has been updated.

Fit and proper persons – see para RG204.193

As part of the application, you will need to:

identify the people involved in the management of your business (these people must be fit and proper people)

specify which of those people will be your responsible managers

provide information about each of the fit and proper people, their role in your credit business and their past conduct, and if they will be responsible managers, their knowledge and experience.

RG204.193 says that a fit and proper person means that the person:

is competent to operate a credit business (as demonstrated by the person’s knowledge, skills and experience)

has the attributes of good character, diligence, honesty, integrity and judgment

is not disqualified by law from performing their role in your credit business

has no conflict of interest in performing their role in your credit business, or any conflict that exists will not create a material risk that the person will fail to properly perform their role in

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your credit business.

You will need to provide a statement about:

if you are a company, each director, secretary and senior manager

if you are a partnership, each partner

but only in respect of those people who will perform duties in relation to the credit activities.

The statement will be that:

a person’s registration or licence under the credit legislation or AFS licence has never been suspended or cancelled

there is no banning order or disqualification order against the person

there has been no order under the Crimes (Criminal Organisations Control) Act 2009 (NSW) or the Serious and Organised Crime (Control) Act 2008 (SA)

the person has never been banned from engaging in a credit activity under a law of a state or territory

the person has never been insolvent

the person has never been disqualified from managing corporations under Part 2D.6 of the Corporations Act

the person has no criminal convictions within the last 10 years.

If a statement cannot be provided in relation to each of these requirements, for example, because the person has a criminal conviction within the last 10 years, you will need to provide further information setting out a full explanation of each matter in issue.

Compliance arrangements – see para RG204.236

As part of the licensing process you will be asked a group of questions that are designed to obtain a confirmation that you have in place and will maintain adequate compliance arrangements and systems including:

you have a written plan that documents your arrangements and systems

the arrangements specify how often compliance with procedures is monitored and reported on

there are people internal to your business responsible for ongoing monitoring and reporting.

These are the minimum requirements, if these arrangements and systems are not in place your application will not proceed.

Outsourcing - see para 204.245

If you outsource any of your functions as a credit licensee ASIC expect that you will have appropriate processes in place to ensure that:

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you have taken due skill and care in choosing a suitable service provider

will monitor their ongoing performance

can deal effectively with any breaches of the outsourcing agreement or actions that lead or might lead to a breach of your licensee obligations.

Supervising and training representatives – see para RG204.249

You will be asked a group of questions regarding whether you:

have a written policy that details the minimum training requirements

maintain a training register

have a documented process for monitoring and supervising all representatives (including credit representatives)

undertake certain checks during your recruitment process for representatives

will ensure that mortgage broker representatives will have a minimum of Certificate IV in financial services (finance/mortgage broking)

have processes to ensure credit representatives are members of an approved EDR scheme.

Adequacy of financial resources – see para RG204.253

You will be asked questions to obtain your confirmation that you have:

a written plan that documents your measures for ensuring that your financial resources are adequate and monitoring your financial resources to ensure they continue to be adequate

a business planning process that includes consideration of the employees and other representatives that you need to engage in your credit business

IT systems to support the business processes.

Information on what ASIC considers adequate resources can be found in RG205. The MFAA will issue a Compliance Bulletin on RG205 soon.

General conduct obligations – see para RG204.42

As part of your application for a credit licence you will be asked for information about how you propose to comply with the general conduct obligations under the following headings:

broad compliance obligations

– engaging in credit activities efficiently, honestly and fairly

– complying with the conditions on your licence

– complying with the credit legislation

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your internal systems

– risk management systems

– arrangements for ensuring that clients are not disadvantaged by conflicts of interest

– internal and external dispute resolution schemes

your people

ensuring that your representatives (employees and directors as well as credit representatives)

– comply with the credit legislation

– are adequately trained and are competent

– maintain the competence to engage in credit activity

your resources

– adequate human and technological resources

– adequate financial resources

compensation

– PI insurance unless you are solely a lender or lessor.

Risk management – see para RG204.265

You will be asked questions to determine whether:

you have documented processes to identify, evaluate, treat and communicate risks in your business, and to monitor and report on risk management issues

you have assessed the risks associated with your business on a probability of those risks occurring

relevant representatives are provided with risk management training.

Each of these risk management requirements is essential and should be prepared before you start you application. If ASIC are not satisfied that each of these aspects are covered off satisfactorily your application will not proceed.

Information about each of your fit and proper people – see para RG204.282 - 291

You will need to supply:

name and date and place of birth

status of each person

educational qualifications

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previous employers (but you only have to include details of employment that you consider as relevant)

police check (not more than 12 months old) called a “Name Check – ASIC Licensing”.

bankruptcy check (not more than 12 months old or a statutory declaration for overseas people)

credit history report (not more than 3 months old).

Summary business description – see para RG204.311

This document is an overview of what your business will involve and how you will operate it in practice. You will need to outline:

the type of credit activities you will engage in

the type of credit products to which your activities will relate (eg home loans, secured personal loans, unsecured loans, credit cards)

how you will assess applications for credit (eg whether you will provide low or no document loans)

your distribution model

your remuneration structure (eg whether you receive ongoing commissions or just up front fees or charge borrowers)

how many offices you’ll have and how geographically diverse your business is and how you supervise your representatives if they are located away from your main office

if you’ve outsourced functions, where the outsourced service provider is located and how you have decided upon them as an appropriate person to provide these functions for you.

Licence fees – see para RG204.61 - 64

The application fee and the annual licence fee will be determined by:

for lenders, the total amount of credit advanced

for lessors, the total rent received

for others, the total applications processed

in the financial year before the licence application is made.

The annual fee for amounts less than $100 million is $450 for a sole trader and $1000 for companies. At the date this manual was prepared, it was unclear whether a sole trader included a one person sole director/secretary company. Higher fees apply to larger amounts and for non-electronic lodgement. There is a discount for streamline applicants (ADIs and WA A and B class licence holders).

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4.16 RG 206 – Competence and Training

ASIC has released RG206 which provides guidance on competence and training requirements. A summary of the key messages from RG206 appears in the following table.

Required experience

At the minimum you need to have responsible managers with at least two years relevant problem-free experience and either:

credit industry qualifications to at least the Certificate IV level, and if you are a mortgage broker, at least Certificate IV in Financial Services (Finance/Mortgage Broking); or

another general relevant higher level qualification (eg a diploma or university degree) (RG206.5)

As part of proving that the responsible managers have had two years problem-free experience, ASIC could ask for references from previous supervisors within a credit business (RG206.48).

You also need to have measures in place to ensure you maintain your organisational competence at all times, to ensure that responsible managers are undertaking at least 20 hours of continuing professional development per year, and to ensure that you are maintaining records of training (RG206.6 and RG206.8).

‘Problem-free’ experience is experience not marred by significant non-compliance issues including instances where either ASIC or other regulators have taken action against the person (RG206.51).

Transition arrangements

Licensees have until 30 June 2014 to comply. Until then ASIC will accept:

responsible managers of lenders who can demonstrate five years relevant problem-free experience; and

responsible managers of businesses providing credit assistance who can demonstrate two years relevant problem-free experience (RG206.20 and RG206.59)

Until 30 June 2012, people who are mentored according to the MFAA’s mentoring guidelines could be eligible as a responsible manager once they’ve completed their mentoring. After 30 June 2012, ASIC would expect all credit licensees providing mortgage broking services to have two years problem-free experience working for a licensed mortgage broker prior to seeking a credit licence in their own right. This experience could be as credit representatives or employees (RG 206.46 and RG206.50).

Credit representatives

There are no minimum training standards required for representatives including staff, agents and authorised credit representatives, although training must meet industry standards where applicable for particular products (RG206.17). Rather, licensees must determine for themselves the appropriate initial and ongoing training (RG206.6 and RG206.15). However, mortgage brokers providing assistance on credit secured by real property must have at least a Certificate IV in Financial Services (Finance/Mortgage Broking) (RG206.6, RG206.16 and RG206.71).

Responsible managers

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In determining who will be your responsible managers, consider which people are primarily responsible for managing the credit activities rather than relying on job titles (RG206.26).

For large businesses, there may be many senior managers and directors who perform duties in relation to credit activities. In this case, you should identify as responsible managers, a subset of the people required to be fit and proper being those directly involved in managing the credit activities. The responsible managers should not be those performing a governance role rather than a management role (eg non-executive directors, company secretaries, human resources director) (RG206.28).

For small businesses, the responsible manager will be the person responsible for the day to day running of the business specifically in relation to the provision of credit activities for the business (206.31).

Key person condition

If a business’ organisational competence is heavily dependent on one or two responsible managers, being the ‘key people’, a key person condition may be imposed on the licence requiring the business to inform ASIC of responsible manager replacements (206.33 and 204.231).

Additional information about responsible managers

In your licence application you must provide the following information about your responsible managers that may indicate significant non-compliance issues in the past 10 years:

(a) any refusals or restrictions that have been applied in relation to carrying on a trade, business or profession for which an authorisation (licence, certificate or other authority) is required by law;

(b) any disciplinary action in relation to any such authorisation;

(c) details of whether they have been the subject of any investigations or proceedings that are still current or pending and which may result in disciplinary action being taken in relation to any such authorisation;

(d) details of whether they have been engaged in the management of any companies or businesses that have had a licence under the Corporations Act 2001 (or previous corresponding laws) cancelled;

(e) details of whether they have been reprimanded, or disqualified or removed, by a professional or regulatory body in relation to matters relating to the person’s honesty, integrity or business conduct;

(f) details of whether they have had any past, present or pending claim made against a professional indemnity (PI) insurance policy in relation to advice they have tendered;

(g) whether they have been refused PI insurance;

(h) whether they have been denied accreditation by a lender, mortgage manager or mortgage insurer;

(i) whether they have had their accreditation cancelled or suspended by a lender, mortgage manager or mortgage insurer, or had their membership of an aggregator or franchise group terminated, or have similar action pending against them, other than for volume reasons;

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(j) whether they have been the subject of administrative, civil or criminal proceedings or

enforcement action, which were determined adversely to them (including by their consenting to an order or direction, or giving an undertaking not to engage in unlawful or improper conduct) in any country;

(k) whether they have ever carried on business under any other name than the name shown in the application; and

(l) whether they have been known by any name other than the name shown on the application (RG206.53).

4.17 RG 207 – Credit Licensing – Financial Requirements

ASIC has released RG207 which provides guidance on the financial requirements to hold a licence. A summary of the key messages from RG207 appears in the following table.

What you will need to do to comply with the financial resource requirements will vary depending on the size and nature of the business (RG207.5).

As a minimum, ASIC expects you to:

ensure that you have access to sufficient financial resources to be able to meet all your debts as and when they become due and payable

plan and monitor cash flows to make sure they are sufficient to adequately meet your obligations as a license under the national Credit Act

keep written records that demonstrate that your financial resources are being monitored on a regular basis (RG207.6)

ASIC expects larger businesses to designate a senior person to be responsible to ensure that your financial resources remain adequate at all times – called the financial manager (RG207.8). The financial manager should adopt a process for determining whether you have adequate financial resources (RG207.19). In smaller businesses, this role may be conducted by the owner or one of the principals of the business (RG207.18).

ASIC do not impose specific minimum financial resource requirements (RG207.29). For example, RG207 does not specify that you must prove you have cash resources to run your business for the next six months. Rather, you should assess what risks and costs your business faces and ensure that you have sufficient resources to meet them.

In assessing an application for a credit licence ASIC may ask for an audit report prepared by a suitably qualified person (as authorised by s 37(4)(b) of the NCCP).

The financial resource requirements will form part of the ongoing requirements of a licensed entity, and will need to be addressed and confirmed as adequate in your annual compliance certificate.

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Part 5. Assessing whether a Loan is Unsuitable

5.1 Do not make or arrange an unsuitable loan

Brokers must not provide credit assistance (arrange a loan, arrange an increase in the loan, or recommend that a borrower stay in an existing credit contract) unless within 90 days prior to the date when the assistance is provided, the broker has made a preliminary assessment of whether the contract will be unsuitable. – see s 115 NCCP. Note that the 90 days is computed until when the assistance is provided, not when the loan is made.

Lenders must not make a loan or increase a principal sum unless within 90 days of entering the credit contract or increasing the loan, the lender has assessed whether the loan or the principal increase will be unsuitable – see s 128 NCCP. (The period is proposed to be extended from 90 days to 120 days pursuant to regulation 26 but only in respect of loans for the purchase of residential property and which are secured by a mortgage over the property).

Lessors must not grant a lease unless within 90 days of the lease being made, the lessor has assessed whether the lease will be unsuitable – see s 151 NCCP.

These rules commence on 1 July 2010 except for ADIs and RFCs. ADIs and RFCs must comply from 1 January 2011.

5.2 How is the assessment and verification made?

Before making the assessment, you must:

make reasonable enquiries about the borrower’s requirements and objectives

make reasonable enquiries about the borrower’s financial situation

take reasonable steps to verify that financial situation

make any enquiries prescribed by the regulations [nothing proposed to be prescribed yet]

take any steps prescribed by the regulations [nothing proposed to be prescribed yet]

Remember there are two steps: making enquiries and verification. There is no need to verify all the financial information you collect. The method of verification can vary from case to case and must be prudent in the circumstances of the case.

Credit will be deemed to be unsuitable if at the time of the assessment it is likely that at the anticipated time the loan is made:

the borrower could not pay or could only pay with substantial hardship; or

the loan will not meet the borrower’s objectives; or

any circumstances prescribed by the regulation exist [nothing prescribed yet].

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If the borrower can only repay by selling the borrower’s principal place of residence, it is presumed that the loan will cause substantial hardship unless the contrary is proved. That doesn’t mean that a sale of the borrower’s home cannot be considered, but if the sale of the borrower’s home is a factor, the other circumstances of the case must demonstrate that the loan will not cause substantial hardship.

It’s important to note that this presumption relates only to the borrower’s principal place of residence. This presumption will not apply if the borrower has to sell other assets, for example an investment property. However, relying on sale of assets needs to be reasonable in all the circumstances of the case.

Whether a particular loan is unsuitable depends on all the circumstances of the case. For example, what is unsuitable for an unsophisticated borrower with low income and few assets may not be unsuitable for sophisticated well off person.

5.3 Providing a copy of the assessment

From 1 January 2011, lenders and brokers must provide a copy of the assessment if:

in the case of brokers, credit assistance is provided

in the case of lenders, a loan is made or the principal sum increased

It is proposed to incorporate procedures and precedents for providing the assessment into this manual at a later date – see Part 10 – Example Documents

5.4 How low can you go? (Lo-doc and no-doc lending)

It appears that no doc lending (ie a pure asset lend) will not comply with the NCCP because the NCCP imposes an obligation to make reasonable enquiries about the borrower’s financial situation and take reasonable steps to verify that situation. It seems that it can never be reasonable to make no enquiries as to the borrower’s financial situation in relation to an NCC regulated loan.

On the other hand, lo doc lending is still possible. What is reasonable has been called by ASIC as scaleable. That means that you need to look at all the circumstances of the case.

In some cases (for example a low LVR loan to an experienced customer), minimal enquiries and verification will be sufficient. There will be some cases where stated income from a borrower, unsupported by an accountant, or from a borrower supported by the accountant will be acceptable.

The emphasis on some cases is deliberate and important. While there will be cases where stated income is sufficient, there will be even more cases where stated income is not sufficient. It depends on the circumstance of the case. This is what ASIC refers to the scalability. The trick is to devise guidelines for when stated income is acceptable and when it isn’t. It will rarely if ever be acceptable not to enquire into and verify income of PAYG borrowers.

The obligation is not only to obtain information regarding the borrower’s financial situation but also to take reasonable steps to verify the borrower’s financial situation. Generally, that will require some positive steps to verify the information provided by the consumer.

Although, these restrictions only apply to loans regulated by the NCC, it’s important to remember that loans which are not regulated by the NCC can be varied or set aside under

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various legal doctrines. In several cases courts have varied or set aside unregulated loans on the basis that they are unconscionable.

5.5 Other items which might be relevant in determining whether a loan is unsuitable

Besides obtaining and verifying financial information, there are other important aspects which will go towards determining whether a loan is unsuitable:

the procedures used to verify the identity of the borrower

how money is paid on settlement. If money is not paid in accordance with the stated purpose, there is a good chance the loan will be unsuitable, and there is increased risk of fraud or forgery tainting the transaction.

5.6 Other comments

It is important that appropriate enquiries are made. This raises a question about the kind of things you need to enquire about. For example, do you need to ask about an impending divorce or retrenchment?

The requirement to enquire and verify creates challenges for streamlined processes such as on line credit applications.

When and if store credit (point of sale credit) becomes regulated, it may be impossible to do on the spot assessment and verification. There may need to be a delay in the delivery of goods until the assessment and verification has been conducted and the loan approved.

A key issue for lenders is to what extent they can rely on information provided by brokers or other outsourced service providers. There is no prohibition on lenders having enquiries and verification conducted by third parties, but if the work is not properly carried out the lender will be liable because the legal obligation is imposed on the lender as licensee. A lender may be able to reduce this risk by appointing those third parties as its credit representative.

As part of the income enquiries, brokers and lenders may find out that the borrower has not been declaring all its income for tax purposes. Lenders and agents of lenders will need to consider s 41 of the AML / CTF Act, which imposes an obligation on a reporting entity to give a report to AUSTRAC where it has reasonable grounds to suspect tax evasion.

Section 133(2) of the NCCP states that lenders must not make or increase a loan which is unsuitable at the time the contract is entered or the increase is provided. Presumably, the lender can rely on information it obtained 90 – 120 days before the credit contract is entered or principal increased, although this is not entirely clear.

5.7 Reverse mortgages

Whether special regulation is required for reverse mortgages is to be considered in Phase 2 of the Commonwealth regulation of credit.

Meanwhile, reverse mortgages will be regulated by the NCCP and the NCC. Brokers and lenders will need to ensure that a reverse mortgage is not unsuitable for the borrower and that it meets the borrower’s requirements and objectives.

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5.8 RG 209 – ASIC guidance on responsible lending – unsuitable loans

ASIC has released RG207 which provides guidance on the financial requirements to hold a licence. A summary of the key messages from RG207 appears below.

The steps required to reasonably enquire and verify are scalable

The obligation to make reasonable enquiries and take reasonable steps to verify information is scalable – that is, what needs to be done varies depending on the circumstances - RG 209.17

RG 209.18 provides some examples of scalability. More extensive enquiries are likely to be necessary when:

the potential negative impact on the consumer is likely to be relatively serious if the credit contract is unsuitable – eg if the size of the loan is large relative to the consumer’s capacity to repay the loan

it is evident that the consumer has limited capacity to understand the credit contract, the consumer has conflicting objectives, the consumer is confused about their objectives, or there is an apparent mismatch between the consumer’s objective and the product being considered by the consumer

the product is a reverse mortgage

a licensee offers a debt consolidation service.

Less extensive enquiries are likely to be necessary when:

the credit contract has relatively simple terms that most consumers can easily understand

the consumer is an existing customer.

A credit card has no particular “loan purpose” and so there would be a limited requirement to understand a consumer’s requirements and objectives. However, enquiries about the maximum limit the consumer requires is appropriate - RG 209.29.

Supervision and processes for enquiry and verification

Licensees will need to be able to demonstrate that they have adequate processes in place to ensure that reasonable enquiries are made about consumers - RG 209.30. These may be product specific processes - RG 209.31.

The supervision of compliance processes will depend on each business model. For example, geographically disbursed employees will require specific measures to ensure adequate supervision. This could include compliance staff being located in regional offices, visiting regional offices, conducting regular audits, undertaking spot checks, or using a centralised system for assessing credit applications - RG 209.32.

A system that only measures the credit risk of the consumer but does not assess the consumer’s capacity to repay will not meet the responsible lending requirements (although such a system may provide a good prediction about the overall risk of default in the loan portfolio) - RG 209.34.

Consumers can be assessed online or face-to-face - RG 209.35.

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In some circumstances credit providers will be able to verify a consumer’s financial situation without receiving information from the consumer. However, credit providers should take care when relying on such information as it may not reflect the consumer’s entire financial position - RG 209.40.

In some circumstances it may be necessary to make additional enquiries when the information provided appears inconsistent (for example, a student with $6,000 per month income) - RG 209.41/42.

Using information provided by third parties

Credit providers can use information provided by a broker or other intermediary, but they need to have processes in place to ensure the reliability of that information - RG 209.45/46. These processes could include:

conducting ‘spot checks’ by re-verification

only using information from intermediaries that have robust compliance arrangements

having processes to actively discourage inappropriate practices (eg ensuring that any incentives offered to intermediaries encourage rather than discourage appropriate information collection practices).

Making a preliminary or final assessment of the credit

Licensees need to be able to demonstrate that they have adequate processes in place to make the assessment - RG 209.54.

The assessment may require consideration against the background of credit contracts that are commonly available in the market - RG 209.55.

All the costs of a refinancing must be taken into account when assessing a refinance - RG 209.58.

Generally, consumers should be able to meet their obligations from income rather than equity in an asset. However, there may be circumstances where it is not unreasonable to rely on the sale of an asset for repayment (eg bridging loans and reverse mortgages) - RG 209.66. However, remember that if the borrower can only repay by selling their principal place of residence, it is presumed that the loan will cause substantial hardship unless the contrary is established - RG 209.67. Care is required with balloon repayments to ensure that the consumer understands, and has the capacity to cover, the final repayment - RG 209.68.

A refinance can be justified on the basis of financial benefit or other reasons (eg customer service, greater flexibility, additional product flexibility) - RG 209.75.

Employees must be adequately supervised and trained to undertake refinance activities. Licensees are required to make reasonable enquiries about the consumer’s existing credit arrangements before forming a view about whether the new credit is ‘not unsuitable’- . RG 209.77.

Providing a copy of the assessment

The assessment should be concise and easy for consumers to understand and include reference to the relevant factual information provided by the consumer used to assess the credit contract as ‘not unsuitable’ - RG 209.82.

Commercially sensitive lending criteria need not be disclosed – RG 209.85. [Author’s comment: Remember, there is no need for a lender to give a copy of the credit assessment if a loan is declined, so

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if a loan is declined because of asset concentration risk or a whim, these factors need not be disclosed. It is unfortunate that brokers will have to provide a copy of the credit assessment for loans which are rejected, as the obligation arises as soon as credit assistance is given – which occurs as soon a broker suggests that an application is made for a particular loan or lease with a particular lender.]

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Part 6. Mortgage Managers and Non-Balance Sheet Lenders

6.1 Overview

The NCCP deals primarily with lenders and brokers. The provisions aren’t specifically designed for more complex arrangements such as mortgage managers and non-balance sheet lenders.

Servicers, program managers, and mortgage managers often derive income from a margin between cost of funds and the interest rate paid by borrowers. Although these payments are categorised as margin or service fees, from a legal perspective they probably fall within the term commission and therefore need to be disclosed in the same way as broker commissions.

This disclosure could place these businesses at a competitive disadvantage to balance sheet lenders as balance sheet lenders do not need to disclose their margin. Also, disclosure of the margin is not useful to borrowers because if they compare margin against brokers’ commission, they might think the larger amount of margin indicates the loan is less suitable.

6.2 Exemptions for managers and servicers

A mortgage manager is usually:

involved in the front and back end of a customer relationship

involved with the approval and collection process

the prime contact for the customer

has a branded loan

Loan servicers and program mangers are involved in establishing and managing the mortgage program.

However, great difficulty has been encountered over many years in creating a precise legal description of these businesses because there are so many business models.

Further, regulators do not want brokers who sell white label products and are able to set interest rates on a case by case basis to be exempt from disclosing their commission to borrowers. This arises from the concern that where a person dealing with the consumer has the right to set the interest rate, the most disadvantaged borrowers are likely to be further disadvantaged by having an increased margin applied to their loan.

Currently NSW has two exemptions to address this problem: the exclusive arrangement and first choice exemption.

In WA, managers need only disclose their commission if they deal direct with the public.

At the date this manual is prepared, Treasury and ASIC are still considering the nature of any exemption under the NCCP disclosure regime which commences on 1 January 2011.

6.3 Prohibition on unsuitable loans

Lenders who are not ADIs or RFCs, non balance sheet lenders, and managers may be at a competitive disadvantage from 1 July 2010 because the unsuitable loans prohibition applies to

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them from 1 July 2010. The unsuitable loan provisions do not apply to ADIs or RFCs until 1 January 2011.

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Part 7. Disclosures

7.1 Overview

The NCCP and the MFAA Code of Practice call for a number of disclosures.

Disclosures by lenders

Item Law When applicable

Commission paid to or by the credit provider for the introduction of credit business

s 15(M) UCCC

s 17(14) NCC

Now

Credit Guide s 126 NCCP 1 January 2011

A copy of the credit assessment if the loan is made or increased

s 132 NCCP 1 January 2011

Disclosure of by credit assistants

Item Law When applicable

Commission generally clauses 33 and 34 of the MFAA’s Code of Practice

Now

Commission if the broker is the borrower’s agent or owes the borrower a fiduciary duty

Common law Now

Commission where the borrower resides in NSW, UCCC regulated loans only

Consumer Credit Administration Act 1995

Now. Expected to cease on 31/12/10

Commission where the borrower resides in Victoria, UCCC regulated loans only

Consumer Credit (Victoria) Act 1995

Now. Expected to cease on 31/12/10 or before.

Commission where the borrower resides in ACT, UCCC regulated loans only. Disclosure only to the person paying the commission. There are limits on commission.

Consumer Credit (Administration) Act 1996

Now. Expected to cease on 31/12/10 or before.

Commission where the borrower resides in WA, applies to all loans, not just UCCC regulated loans

Finance Brokers Control Act

Now. Expected to cease on 31/12/10 or before.

Credit guide, quote, and credit proposal documents

s113, 114 and 121 NCCP

1 January 2011

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Item Law When applicable

Provide a copy of the preliminary assessment if credit assistance is given

s120 NCCP 1 January 2011

South Australia, commission. No requirement to have an FBC as such, but benefits received by a fiduciary must be disclosed. Brokers may be fiduciary depending on the circumstances of the case. The disclosure must include:

the nature of the benefit

the value (or approximate value) of the benefit; and

the identity of the third party from whom the benefit has been or is to be received.

This obligation to make disclosure is most conveniently effected by having an FBC.

Criminal Law Consolidation Act

Now. Not expected to be displaced by NCCP

7.2 Commission disclosure under the NCCP

From 1 January 2011, s 113(2)(g) NCCP requires credit assistants’ credit guides to ‘specify information about commissions the licensee, employee, director or credit representative is likely to receive directly or indirectly from credit providers’.

The requirement to provide information about commissions paid to employees or directors is novel and may cause some problems.

Disclosure is not required by ‘up the line’ brokers (ie intermediaries who are not dealing with the borrower, such as aggregators) unless the loan writer dealing with the consumer is a credit representative of the up the line entity. Where the loan writer is a credit representative, a credit guide for both the licensee and the credit representative must be handed over.

The MFAA will provide pro forma credit guides and quotes to assist commission disclosure as required from 1 January 2011 – see Part 10 –Example Documents.

Credit assistants will also be required to provide a credit proposal document setting out details of the proposed loan - see Part 10 –Example Documents.

7.3 Copy of the assessment

Sections 120(1) and 132(1) NCCP require a copy of the assessment to be given to the borrower by credit assistants and lenders (respectively).

Sections 120(2) and 132(3) NCCP specify that the nature of this report can be prescribed by regulation if any. There is an intrinsic inconsistency between these provisions as 120(1) and 132(1) specify that a copy of the assessment must be given, yet s.120(2) and 132(3) recognise that the form may be subject to regulation (which means it is not the assessment being given).

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The MFAA maintains that credit assistants (brokers) should only be required to provide a copy of the assessment if the loan is made. Currently the legislation requires a copy be provided on request if credit assistance is given. It is unclear what amounts to credit assistance, and it will be unhelpful for a copy of the assessment to be given where a loan is not made.

The MFAA will provide an example of how to disclose a credit assessment disclosure as required from 1 January 2011 – see Part 10 –Example Documents

7.4 Requirements for finance broking contracts (FBCs)

The NCCP responsible lending provisions relating to disclosure do not commence until 1 January 2011. Until then State laws as shown in the table above may continue to apply. The position is uncertain at the date of preparation of this summary.

Irrespective of whether State laws continue to apply, the MFAA Code of Practice requires brokers to enter a finance broking contract (FBC) with borrowers and disclose commissions and other benefits in all cases (ie even though the loan is not UCCC regulated, the borrower is paying no commission, and there is no legislative requirement to do so).

In addition brokers should obtain privacy consents to allow brokers (as distinct from lenders) to use and collect personal information regarding the customer. The privacy consent should also allow the broker to pass on information to appropriate investigatory bodies if necessary.

Brokers should also provide a statement describing the nature of the services the broker provides (eg whether the broker provides advice or is simply selling loans).

7.5 General law obligations

The general law (also called the common law) imposes a duty of care on finance brokers. The level of duty of care will depend on the relationship between the finance broker and the borrower.

If a finance broker purports to act as the agent for the borrower, a relationship of principal and agency arises. In those circumstances, the finance broker has a very high duty of care to the borrower indeed, and must disclose all commissions and any other benefits in full.

The duty of care to the borrower and the obligation to disclose commission is likely to be different depending on the business model adopted by the finance broker. For example:

lowest duty - a mortgage manager who from the borrower’s perspective has similar characteristics to a lender

medium duty - an originator who from the borrower’s perspective has similar characteristics to a sales person, and who does not purport to represent the borrower in any way or have a specific duty of care to the borrower

highest duty - a finance broker, irrespective of whether a fee is payable by the borrower who gives advice to the borrower. In these circumstances, it is likely that the finance broker becomes the agent for the borrower and owes a fiduciary duty of care to the borrower

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Part 8. NCCP – Information about some Provisions

8.1 Credit representatives or licensed?

An issue for large broking companies and aggregators is whether to appoint their brokers as credit representatives or require them to hold their own licence.

Factors in favour of appointing members as credit representatives:

greater certainty that all loans will be put through the licensee (as the licensee’s authorisation of the member will only allow introduction of loans through the licensee)

a saving on licence fees for the licensee and the brokers as a whole

may generate greater loyalty from brokers

Factors in favour of not appointing members as credit representatives:

the licensee is responsible to the client for the conduct of its credit representatives. Where the brokers operate using the name of the licensee, the licensee is probably liable to clients for their brokers’ conduct irrespective of whether the broker is a licensee or credit representative. However, when brokers trade under their own name, appointing the brokers as credit representatives will create a new liability for the licensee

there is increased administration if brokers are credit representatives

cost and difficulty in demonstrating that as licensee you are properly supervising the credit representatives

Although licensees will be liable to clients for the conduct of their credit representatives, generally licensees will not be liable for breaches of the law by them unless the licensee has failed in its duty of reasonable supervision.

A licensee may require some brokers to hold licenses and appoint other brokers as credit representatives.

8.2 Conflicts of interest

Section 47(b) of the NCCP requires licensees to ‘have in place adequate arrangements to ensure that clients of the licensee are not disadvantaged by any conflict of interest that may arise wholly or partly in relation to credit activities engaged in by the licensee or its representatives’. The same obligation is imposed on registered businesses.

It may be insufficient to disclose conflicts of interest (as is the case for the AFSL regime). The licensee must ensure that the borrower is not disadvantaged.

This will pose special challenges for business models where the loan writer can set the interest rate, or where a particular lender is recommended because of volume bonuses.

Other conflicts may arise when a broker or lender is associated with the vendor of the asset being financed by the loan.

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8.3 Annual Compliance certificate

Section 53(1) NCCP requires a licensee to lodge a compliance certificate with ASIC no later than 45 days after the licensee’s licensing anniversary in each year.

[More information will be provided on this topic as it becomes available]

8.4 Record retention

A licensee must keep financial records for seven years after the relevant transaction.

[More information will be provided on this topic as it becomes available]

8.5 Penalties

The NCCP, the Regulations and the NCC contain various penalty provisions including:

Civil penalties

Criminal penalties (strict liability)

Criminal penalties (other)

ASIC infringement notices

The civil penalty provisions under the NCCP and breaches of the key requirements under the NCC can only be brought by ASIC when the proceedings seek to impose a penalty on the person that has breached the provision or requirement.

The criminal penalties can only be brought by ASIC and may involve monetary penalties and imprisonment, or both.

There is guidance on the penalties imposed throughout the NCCP and the Regulations, some examples are provided in Part 4 of this manual. In addition to the penalties specified for the particular breaches and offences, the court is able to make further orders in relation to remedies, injunctions and compensation which may be equally detrimental to a licensee.

Although a penalty cannot be more than the maximum amount of penalty units in the penalty provision. Section 167 states that if the person is a body corporate, a partnership or multiple trustees, the court may order the person to pay up to five times the maximum amount of penalty units in the penalty provision!

As an alternative to court proceedings, ASIC may issue infringement notices for either civil penalties or strict liability criminal offences.

There are specific requirements as to the form and contents of an infringement notice including when payment is due and the amounts of the penalty payable under an infringement notice are consistent with the maximum amount permitted in the NCCP:

A strict liability criminal offence

Individual - 1/5th of the maximum penalty amount specified

Body corporate – the maximum penalty amount specified.

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Breach of a civil penalty provision (for specific sections of the Act1)

Individual – 50 penalty units; and

Body corporate – 250 penalty units.

The amount must not exceed 1/40th of the maximum penalty amount specified for a civil penalty.

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Part 9. Summary of Key Provisions – NCCP and Associated Legislation

and Regulations

[LINK TO SEPARATE DOCUMENT]

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PART 10. Example Documents

AML identification form

Appointment of credit representative - company

Appointment of credit representative - individual

Compliance Plan – comprises a check list (required from when licence applied for)

Credit assessment report (required from 1 January 2011) (yet to be supplied)

Credit Guide, Quote, and Credit Proposal Documents (required from 1 January 2011) (yet to be supplied)

Declaration by directors and secretaries of companies applying for registration

IDR Procedures (required from when licence applied for) (yet to be supplied)

NCCP Charter

National Finance Broking Contract (for use to 1 January 2011)

Policy to ensure clients are not disadvantaged by any conflict of interest (yet to be supplied)

Privacy consent – brokers

Privacy consent – managers

Privacy consent – managers

Registration Checklist

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Part 11. Other Laws Applying to the Finance Industry

This is not an exhaustive list, but attempts to identify the key requirements.

11.1 Registration and licensing requirements – finance brokers

Prior to 1 July 2010, finance brokers were required to be licensed in Western Australia and registered in the ACT. Both these schemes are expected to end on 30 June 2010.

The Western Australian scheme licensed finance brokers in respect of all credit. After the commencement of the NCCP finance brokers will not need to be registered in WA or elsewhere to sell credit other than NCC regulated credit. For example, currently you need a brokers licence in WA to arrange a loan for a company or for business purposes. After 1 July 2010 no licence will be required.

11.2 Licensing and registration - credit providers

Prior to 1 July 2010, lenders of UCCC regulated credit had to be registered in Victoria and ACT and licensed in WA. These three regimes are expected to cease on 30 June 2010.

As a result, there is a widening of regulation to cover:

states and NT which previously had no licensing or registration scheme

loans to individuals to ‘purchase renovate or improve residential property for investment purposes’ and refinancing of those loans as these loans are regulated by the NCC

11.3 Other legislation and regulation

In addition to licensing and registration regimes, finance brokers are subject to other laws, including in particular:

Trade Practices Act, ASIC Act, and Fair Trading Act – must not act in a misleading and deceptive fashion or unconscionably

Privacy Act – see MFAA’s Privacy Act Module Part 17

use of comparison rates as required by the NCC - see MFAA’s Comparison Rate Module (the requirement for Comparison Rate Schedules ceases on 1 July 2010)

industry codes of conduct (eg. MFAA’s Code of Practice, Code of Banking Practice)

Door to Door Trading Acts - see Part 12

the hawking prohibitions in the Corporations Act – see Part 13

e-marketing Code of Conduct - see Part 14

the Spam Act - see Part 14

the requirements for a ‘debt collector's licence’ – see para 11.4 below

the Financial Sector (Collection of Data) Act (Cth) – see Part 15

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unjust contract terms – proposed amendments to the ASIC Act with complementary state legislation and Fair Trading Act (Vic)

11.4 Debt collectors licence

All states and territories except ACT require people who conduct the business of commercial and private enquiry agents to be licensed or registered. This includes carrying on the business of debt collection.

Debt collection is defined in the Commercial Agents and Private Inquiry Agents Act 2004 (NSW) as ‘an activity carried out by a person on behalf of a second person (not being his/her employer) in the exercise of the second person's rights under a debt owed by a third person’. The definition is similar in legislation of other places.

The relevant legislation is Property Agents and Motor Dealers Act 2000 (Qld), Commercial Agents and Private Inquiry Agents Act 2004 (NSW), Private Agents Act 1966 (Vic), Security and Investigations Agents Act 2002 (Tas), Security and Investigation Agents Act 1995 (SA), Debt Collectors Licensing Act 1964 (WA), and Commercial and Private Agents Licensing Act 1979 (NT)

It seems from the Consumer Affairs Legislation Amendment Bill 2009 (Vic), Part 4, that the Private Agents Act 1966 (Vic) will be repealed and that all licenses must be handed in during January 2011. The licensing regime will be replaced with a negative licensing regime under the Fair Trading Act 1999 (Vic). It is unclear from what date the proposed negative licensing scheme will apply.

There is potential for mortgage managers and servicers to fall within this definition because they collect debts on behalf of a third party, namely the lender.

Generally mortgage managers and servicers are not licensed under these acts in the same way as real estate agents who collect rent are not licensed. This is because the legislation is intended to regulate people whose predominant business is debt collection. NSW is considering an exemption for mortgage managers and servicers.

Mortgage managers and servicers who do not hold themselves out as providing a stand alone service of debt collecting and collect debts only as an ancillary function of mortgage management should not be considered to be ‘carrying on the business’ of debt collecting.

The NCCP contemplates that debt collectors must hold an ACL or be a credit representative. The regulations provide an exemption for debt collectors who are licensed, registered, or exempt under state and territory laws until 1 July 2011. The states and territories need to exempt businesses registered under the NCCP Act from their commercial agents licensing/registration regime, but there is no legislation to that effect at the date of preparing this commentary.

11.5 NSW, ACT and QLD – cap on cost of interest rates and fees

The aggregate of interest and fees and charges payable under UCCC regulated contracts must not exceed 48% per annum in NSW, ACT, and Queensland. Credit fees and charges do not include enforcement expenses, but include default fees. These provisions are contained in the:

Consumer Credit (New South Wales) Act

Fair Trading Act 1992 (ACT)

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Consumer Credit (Queensland) Act, to be transferred to the Credit (Commonwealth Powers) Act 2009 (Qld) on commencement of that Act.

There is an exemption for fees and charges relating to temporary credit facilities provided in relation to an existing credit or debit account (eg overdrafts and short term excesses) established by an authorised deposit taking institution (ADIs - eg banks, building societies, and credit unions).

In NSW a Statement of Regulatory Intent dated 19 April 2006 makes it clear that although fees and charges must be taken into calculation in determining whether the cap has been breached, there is no need to show this aggregate rate in the credit contract - ie the interest rate and fees and charges can still be shown separately.

11.6 Victoria - cap on interest rates

[At the date this manual was prepared it was unknown whether these provisions will continue to apply after 1 July 2010. This legislation may continue until the Commonwealth considers the Phase 2 reforms.]

In Victoria, A UCCC regulated credit contract is unenforceable if the interest rate exceeds 48% per annum. Any mortgage which relates to a UCCC regulated contract is void if the interest rate exceeds 30% per annum. There is no cap on fees and charges. These provisions are contained in s.39 and s.40 of the Consumer Credit (Victoria) Act.

11.7 Early repayment - cost exceeding cap

Sometimes a borrower will be paying more than the interest rate caps specified above if the borrower repays early (eg the combination of establishment and repayment fees may push the effective rate over these limits). This will not breach these laws because the borrower is not obliged to pay in excess of these maximums -- rather the cap is breached as a result of a voluntary act of the borrower repaying early.

11.8 ACT - assess ability to repay – credit cards only

[At the date this manual was prepared it was unknown whether these provisions will continue to apply after 1 July 2010. This requirement is largely if not wholly replaced by the ‘unsuitable lending’ provisions.]

Section 28 of the Fair Trading Act (ACT) makes it an offence in ACT for a credit provider to enter a continuing credit contract for a credit card or increase the limit under a continuing credit contract for a credit card without making a satisfactory assessment process. A continuing contract is an interest only come and go facility (like most credit cards and Line of Credit products).

A satisfactory assessment process is defined to mean that the credit provider must ask the debtor for a statement of the debtor’s financial situation, including:

income

all credit accounts and applicable limits and balances; and

repayment commitments

and the credit provider must take the statement into account in making the assessment.

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This provision may impact mortgage lenders who provide a credit card attached to their loans, however it is unclear whether a card attached to a mortgage product is provided pursuant to a continuing credit contract for a credit card – the contract is arguably for a mortgage loan.

11.9 NSW broker regulation

[At the date this manual was prepared it was unknown whether these provisions will apply after 1 July 2010. They may stay in place until the NCCP disclosure regime commences on 1 January 2011.]

The Consumer Credit Administration Act 1995 requires finance brokers negotiating UCCC regulated credit to enter a written finance broking contract (FBC) with the borrower and disclose commission, irrespective of who is paying the commission.

The MFAA provides a sample finance broking contract – see Part 10 Example Documents.

A finance broker must not demand, receive or accept any commission from a client prior to ‘securing’ the credit – see s4D. Securing probably means obtaining a credit approval rather than the time when the loan is advanced.

Under s4I, a finance broker can collect prior to securing the credit:

valuation fees if paid to the valuer, the lender, or someone authorised to instruct the valuer; and

credit application fees or credit establishment fees if paid to the lender or someone who is authorised to act on behalf of the lender and who will incur the costs of determining the application for credit, or the initial administrative costs of providing the credit, or both.

NSW had exemptions from the requirement to provide FBCs for:

intermediaries who do not deal direct with the borrower – the so called ‘up the line exemption for aggregators and other businesses

the exclusive arrangement and first choice exemption for mortgage managers who do not trade as brokers.

11.10 Australian capital territory

[At the date this manual was prepared it was unknown whether these provisions will apply after 1 July 2010. The requirements for disclosure may stay in place until the NCCP disclosure regime commences on 1 January 2011.]

Summary – Consumer Credit (Administration) Act (ACT)

1. Applies only to UCCC regulated credit - s.3.

2. Maximum commission prescribed - s.35(2). The maximum commission which may be charged or received from a borrower is the greater of:

(i) in respect of the first $5,000 of the credit, not more than 2% plus GST

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(ii) in respect of the portion of the loan exceeding $5,000, not more than 1.5% plus

GST; or

(iii) $6.50 plus GST (see s.35 and regulation 4).

There is no limit on the commission that can be charged to or paid by lenders.

5. FBC required only with the person paying the commission. Where only the lender is paying commission, the FBC is comprised in the Origination Agreement and no FBC is required with the borrower - s.35(1).

6. No commission may be received from the borrower unless the credit is ‘secured’ – we think that means approval not draw down – s.35(3).

The MFAA provides a sample finance broking contract – see Part 10 Example Documents.

11.11 Victoria

[At the date this manual was prepared it was unknown whether these provisions will apply after 1 July 2010. The requirements for disclosure may stay in place until the NCCP disclosure regime commences on 1 January 2011.]

Summary - Consumer Credit (Victoria) Act (VIC)

1. Applies to UCCC regulated credit – s.37A.

2. An FBC containing prescribed information must be signed before a broker may charge or receive any commission from the borrower. Consumer Affairs Victoria considers that the legislation also requires an FBC where commission is payable only by someone other than the borrower. Although this view is not free from argument, the MFAA supports Consumer Affair’s initiative to have FBCs with borrowers irrespective of who is paying the commission and even where commission is payable only by the lender – s.37J.

3. No commission must be received from the borrower unless either:

the borrower ‘accepts’ the credit that is actually obtained; or

the credit negotiated is reasonably comparable to credit specified in the FBC – ie approval is obtained – s.37J(f).

The MFAA provides a sample finance broking contract – see Part 10 Example Documents.

11.12 Western Australia

[At the date this manual was prepared it was unknown whether these provisions will apply after 1 July 2010. The requirements for disclosure may stay in place until the NCCP disclosure regime commences on 1 January 2011.]

Summary – Finance Brokers Control Act - WA

1. Applies to all credit.

2. Maximum commission and fees prescribed.

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3. Brokers must comply with a Code of Conduct.

For information specific to program managers and mortgage managers see the ‘WA Finance Brokers Licensing – Mortgage Managers Practice Module’ on the MFAA web site.

For information in relation to the Code of Conduct and finance broking contracts for WA, see the ‘WA Code of Conduct Module’ and on the MFAA web site.

The MFAA provides a sample finance broking contract – see Part 10 Example Documents.

Maximum commission

The maximum commission is prescribed in the WA Government Gazette dated 20 February 2004, ref CE301.

Different limits apply depending on whether the lender is a ‘Credit Provider’ or not. A Credit Provider is a lender:

(a) regulated under the FSR or APRA

(b) a licensed credit provider in WA; or

(c) registered as a financial corporation under the Commonwealth Financial Sector (Collection of Data) Act 2001).

If the lender is a Credit Provider, the maximum commission for loans other than equipment or personal finance loans) payable by either the borrower or the lender is in aggregate 2% of the loan amount upfront and 0.5% pa of the average outstanding loan balance ‘from time to time’ trail.

If the lender is not a Credit Provider, the maximum commission is:

(a) upfront 2% for loans over $25,000 paid by the borrower and 1.5% paid by the lender; and

(b) trail 0.5% pa paid by the lender.

The maximums for equipment or personal finance is:

(a) upfront from either the lender or the customer (in aggregate), $800 for loans up to $10,000 and thereafter 8% of the loan amount

(b) trail payable by the lender of 0.5% per annum.

A maximum is prescribed for ‘Total Mortgage Management’ 8% of interest collections.

GST is payable in addition to these maximums.

Higher brokerage fees are prescribed for personal and equipment finance.

There may be a written agreement between the borrower and the broker which specifies the time when commission is payable, but otherwise it is payable upon the loan being obtained (except where failure to obtain the loan was the fault of the borrower).

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These maximums relate to the total received from all sources. Accordingly, the commission received from the borrower and the lender taken together, must not exceed these limits.

The WA Finance Brokers Supervisory Board (prior to its undertaking being moved to DOCEP) considered that fees charged to borrowers in budget management/wealth creation/debt reduction plans are ‘so integrally and intimately connected with’ arranging the loan, that fees charged for these services are fees charged for negotiating and arranging the loan. Accordingly, commission maximums, and requirements for FBCs will apply.

Regulations limit the amount that can be charged for:

application fees

inspection fees

transfer of mortgage between investor clients

extension of mortgage

discharge fee

commission on interest collections

miscellaneous charges such as production of title, bank cheques etc

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Part 12. Door to Door Sales Legislation

All states and territories have Acts regulating door to door sales. The legislation will probably apply if:

a broker charges for arranging credit or financial management or any other service; and

the sale is the result of an initial unsolicited approach; and

the sale is not made at the broker’s office; and

the purchase is not for business purposes.

The following will help you determine whether the Acts apply to your business.

Step 1. Is the sale a door to door sale?

The sale will be a door to door sale if the following tests are all satisfied:

the sale is made over the telephone or in the physical presence of the customer, but not if it occurs at the broker’s office. The sale does not need to be at the customer’s home as a result of a door knock campaign; and

the telephone call or the visit is unsolicited. The call or visit will be unsolicited if it is the result of an initial cold call (even if that cold call is the result of a referral); and

the purchaser is not entering the transaction in connection with a business carried on by the purchaser. Accordingly, only sales for primarily private or personal purposes will be regulated.

Step 2. Is the sale a regulated sale?

The Acts regulate the sale of ‘goods or services’ for more than $50 ($75 in Queensland and $100 in NSW).

Generally, contracts for the sale of credit are exempted from the Acts. If the broker is an agent of a specific lender, is not charging the borrower a fee, and is selling that lender’s products, the sale will not be regulated by the door to door Acts because the broker is only selling credit (which is exempt), and isn’t selling broking services. In NSW, brokers who telephone prospective customers in relation to consumer credit do have to comply with the restricted calling hours even though credit itself is exempted.

NB: However, if the broker is selling broking services (as most brokers do), the contract is for the supply of services, namely finance broking services. A finance broking contract will therefore be subject to the Acts but only if the borrower is paying a fee of more than the minimum price ($50/$75/$100). If the borrower is not liable to pay any commission to the broker, the sale of finance broking services will not be regulated by the Acts.

Step 3. What about budget coaching contracts?

Some brokers offer budget coaching programs.

It is important that these services do not involve advice or sale of financial products unless the finance broker holds an AFS licence. However, as long as the advice is confined to budget coaching, this is not

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advice on, or the sale of, a financial product and so the broker does not need an AFS licence to provide this service.

The sale of a budget coaching program is a supply of services, and so the Acts will apply to the sale of these services (provided the answers to steps 1 and 2 are yes).

Step 4. Will the finance broking contract be impacted by the budget coaching contract?

Where two or more contracts relate substantially to the same transaction, the Acts provide that they are to be taken as a single contract. If the effect of this provision is to attach the finance broking contract to the budget coaching contract, then the broker will be unable to lodge the loan application until after the cooling off period.

Although not free from argument, the better view is that the two contracts do not relate substantially to the same transaction. One contract relates to arranging a loan which is a discrete service and capable of sale quite separately from the budget coaching program.

Accordingly, as long as the borrower is paying no commission under the FB contract, the Acts only apply to budget coaching contracts. A broker can sell a budget coaching contract (which will be regulated by the Acts) and broker services (which will not be regulated by the Acts) at the same time. Accordingly, the broker can proceed to lodge the application for a loan with the lenders.

NB: Remember, however, that if the FB contract provides for the borrower to pay any commission then the Acts will apply to the FB contract in its own right.

Step 5. What is required if the Acts apply?

You must give two prescribed forms to the customer before the customer signs the contract. In NSW there is no prescribed form, although the content of the form is the same as the content in the prescribed forms in all other states and territories.

The contract must be in no smaller than 10 point type.

The contract must state clearly in upper case, above the place provide for signature, ‘THIS CONTRACT IS SUBJECT TO A COOLING OFF PERIOD OF XXX DAYS’ in at least 18 point type. In NSW the cooling off period is five days, and ten days in other places.

The supplier must not receive any payment under the contract before the expiration of the cooling off period.

No services may be supplied under the contract before the expiration of the cooling off period. This is the provision which prevents finance brokers from lodging loan applications within the cooling off period if the FB contract provides for the borrower to pay commission for arranging the credit. Of course, the cooling off period only applies if the other requirements for a door to door sale are satisfied (ie Steps 1 and 2 apply).

Customers cannot waive their cooling off rights.

The contract must set out all the terms of the contract including the full price, including any GST.

The broker must sign the contract before the customer signs the contract.

The customer must be given a duplicate of the contract immediately after the making of the contract.

You must not call on a person’s residence in New South Wales after 8.00pm or before 9.00 am on any day. In other states and territories you must not call at a person’s residence:

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at any time on a Sunday or a public holiday.

before 9.00am.

after 8.00 pm on weekdays (6.00pm in Queensland).

after 5.00 pm on Saturdays.

These time restrictions only apply if your visit is regulated by these Acts.

On arrival at the property you must make known to the person the purpose of the call and produce an identity card with your full name and address.

Conclusion

The Acts will have a very major impact on brokers who charge borrowers a commission and use marketing methods which result in sales captured under Step 1. These brokers will need to comply with the Acts and they must not lodge the application with any lender until after the cooling off period has expired.

Details of legislation

Place Legislation

Qld Fair Trading Act 1989

NSW Fair Trading Act 1987

ACT Door to Door Trading Act 1991

Vic Fair Trading Act 1999

Tas Door to Door Trading Act 1986

SA Fair Trading Act 1987

WA Door to Door Trading Act 1987

NT Consumer Affairs and Fair Trading Act

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Part 13. The Hawking Prohibitions in the Corporations Act

Some mortgage brokers may fall under the hawking prohibitions in the Corporations Act. These provisions only apply to the sale of financial products to ‘retail clients’. Credit is not a financial product but other products such as deposits, insurance, and investment products are financial products.

Sections 736, 992A and 992AA of the Corporations Act 2001 provide that a person (the ‘offeror’) must not offer financial products (other than securities or managed investments) for issue or sale to retail clients in the course of, or because of, an unsolicited meeting. There are also procedures which must be complied with if there is an unsolicited telephone call.

13.1 When is a meeting or telephone call ‘unsolicited’?

For a breach of the hawking prohibitions to occur, the offer of financial products to the consumer must be made during or because of, a meeting or telephone call that is ‘unsolicited’. In ASIC’s view, a meeting or telephone call will be unsolicited unless it takes place in response to a positive, clear, and informed request. A positive request involves an active step by the consumer. A meeting or call is not solicited merely because the consumer fails to request that the meeting or telephone call not take place after being given an opportunity to do so.

The nature of the meeting or telephone call being requested by the consumer should be clear from the language of the request. The request should make clear which financial products or classes of financial products the consumer wishes to discuss.

13.2 What is the purpose of the meeting or telephone call?

ASIC considers that a meeting or telephone call requested by a consumer is only solicited in relation to any financial products (or classes of financial products) that are reasonably within the scope of the request. Brokers need to consider each consumer separately, to ensure that they do not offer products which could be considered to be unsolicited.

13.3 Is the person an existing client?

Depending on the circumstances, a meeting or telephone call with an existing client may still be unsolicited for the purposes of the hawking provisions. As indicated above a meeting or telephone call will be unsolicited unless it takes place in response to a positive, clear and informed request. This indicates that there are no special rules for existing clients, unless the client requests that the offeror contact them on an ongoing basis.

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Part 14. The eMarketing Code of Practice

14.1 What are the objectives of the code?

The Code’s objectives are to:

(a) reduce the volume of unsolicited commercial electronic messages received by consumers

(b) provide a plain English outline of how the Spam Act 2003 (the Spam Act) applies to current eMarketing practices; and

(c) promote best practice use of commercial electronic messages in compliance with the Spam Act

14.2 Why was the code developed?

The Code establishes comprehensive, industry-wide rules and guidelines for the sending of commercial electronic messages (‘CEMs’) in compliance with the Spam Act. The Code also provides a framework by which industry can handle complaints about spam and monitor industry compliance with code provisions.

14.3 Spam Act

The Spam Act prohibits the sending of unsolicited commercial electronic messages linked with Australia. In summary:

it is illegal to send most commercial electronic messages to or from Australia without the recipient's consent

certain commercial electronic messages designated in the Act (‘designated commercial electronic messages’), are exempt from the consent requirement

those commercial electronic messages which can be lawfully sent, must include accurate information about the sender and generally contain a functional unsubscribe facility

it is illegal to supply, acquire or use address-harvesting software or a harvested address list; and

civil penalties of up to $1.1m apply to these illegal activities

An electronic message includes email, instant messaging and SMS and other forms of electronic messaging but does not include ordinary voice telephone calls. An electronic message will be considered commercial if one of the purposes of the electronic message is a commercial purpose. An electronic message is unsolicited if the recipient did not give prior consent to being sent the message. This consent my either be expressed or implied from conduct of an individual or business.

Unlike the private sector provisions of the Privacy Act, the Spam Act applies to individuals and organisations regardless of their business turnover, as well as government bodies. As a result, the Act does not provide specific guidance to participants in the eMarketing industry involved in email or mobile marketing, on how current industry practice should be amended to ensure compliance.

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14.4 The Code

The Code was developed under s112(1A) of the Telecommunications Act 1997 (the Act). It is enforceable by the Australian Communications and Media Authority (ACMA) on those entities who undertake ‘e-marketing activities’ (defined under the s109A of the Act). The code applies to all persons, including individuals and organisations, undertaking an e-marketing activity.

The code defines those who undertake ‘eMarketing activities’ as persons who market, advertise or promote goods or services via using eMarketing as their ‘sole or principal means’ of marketing, promoting, or who market in this way by contract or arrangement on behalf of a third party.

The ACMA has released a policy statement to provide guidance on the interpretation of ‘sole or principal’. In general, the ACMA considers that to be considered the principal means of an entity’s marketing, advertising or promotion of its own goods or services eMarketing should be the entity’s first means of marketing in terms of:

importance

frequency; or

the chief, main or leading means of marketing

The ACMA considers that an effective measure of these factors is, when considering the total marketing, advertising and promotional activities undertaken by an entity in relation to its entire product and/or service range, the number of potential customers eMarketing campaigns are expected to reach when compared to other means of marketing, advertising and promotion employed by that entity measured in a 12 month period.

14.5 What are your compliance obligations?

Organisations who use eMarketing activities are obliged to comply with the Spam Act as well as the Code. The Code ensures that organisations involved in eMarketing:

properly understand their compliance requirements under the Spam Act

have an internal procedure for dealing with complaints which is fair, effective, confidential and easy to use by the complainant. They must make details of their complaint handling process accessible within each Commercial Communication

follow rules concerning the age sensitive content of Commercial Communications; and

follow rules concerning viral messages

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Part 15. Financial Sector (Collection of Data) Act

The Financial Sector (Collection of Data) Act requires most mortgage lenders to be registered.

The Financial Sector (Collection of Data) Act requires most mortgage lenders to be registered.

15.1 Who is regulated by the Act?

A company is required to register if:

its total assets exceed $5 million; and

its sole or principal business in Australia is borrowing money and provision of finance; or

its assets arising from the provision of finance exceed 50 per cent of its total assets in Australia.

Exemptions include:

ADIs

insurance companies regulated by APRA

trustees authorised by government to conduct trustee business

The Act does not apply to individuals or trusts – it only applies to companies

15.2 If I am a registrable entity how do I become listed on the Register of Entities?

APRA will register an entity on the Register of Entities upon receipt of an Application Form completed by the entity.

It is the responsibility of the registrable entity to register with APRA within 60 days of the day on which the corporation becomes a registrable corporation.

To obtain registration, the registrable entity is required to provide APRA with:

(a) the name, place and date of incorporation and the address of the registered office of the corporation

(b) the name and address of the registered office of every corporation that is related to the corporation

(c) details of the principal methods by which the corporation ordinarily borrows money

(d) details of the principal kinds of finance ordinarily provided by the corporation

(e) a copy of the corporation’s last audited statement of financial position

Upon submission of an application for registration, APRA will determine which category on the Register of Entities that the corporation should be placed in. There are three categories on the Register of Entities:

Category D – Money Market Corporations

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Category I – Intra-Group Financiers

Category Other - for all other entities

Registration does not provide registered entities with any special status. A registered entity is not permitted to advertise that they are registered with APRA or that they are registered under the Financial Sector (Collection of Data) Act.

15.3 What happens if I am a registrable entity and I am not registered?

There are severe penalties for "registrable entities" which fail to register. APRA may impose a fine of $5,000 per day for "registrable entities" which fail to register within 60 days of becoming eligible for registration.

In addition, a registered entity which fails to advise APRA of a change in:

(a) name

(b) registered address; or

(c) principal methods of borrowing or lending

may be fined $1,000.

15.4 If I am a registered entity what must I do?

The extent of reporting varies having regard to the size of the assets of the reporting entity.

APRA has power under the Financial Sector (Collection of Data) Act to determine the reporting standards that all registered entities must comply with. The Act enables APRA to collect statistical data for use in compiling monetary and credit aggregates by way of periodic reports submitted by registered entities. These reports must be submitted either monthly or quarterly as determined by APRA. Upon registration, APRA will advise the registered entity of the forms which it must submit periodically.

APRA may impose a fine on any registered entity which:

(a) fails to provide the requisite reports to APRA within 21 days of the end of the reporting month or quarter; or

(b) fails to provide any other additional information as requested by APRA

APRA may exempt an entity from the requirement to comply with some or all of the applicable reporting requirements. APRA will record these "exempted entities" on the Register of Entities.

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Part 16. Australian Financial Services licences

Normally credit is not a financial product, and so finance brokers dealing with ‘pure’ credit will not need to hold an Australian Financial Services licence or be the authorised representative of an AFSL holder.

Intermediaries who provide additional services need to be aware of the types of activity governed by the AFSL regime. The MFAA and Gadens Lawyers have a separate module titled ‘Australian Financial Services Licensing’.

16.1 Brief summary

A deposit product (eg, a bank account) is a financial product – accordingly, finance brokers will need to hold an AFSL, be an authorised representative, or provide ‘no advice’.

An off-set account involves a deposit account and so ordinarily would be a financial product. ASIC Class Order 03/1048 - Mortgage Offset accounts relieves finance brokers from holding an AFSL or being an authorised representative if the finance broker is a member of an eligible alternate dispute resolution scheme. Credit Ombudsman Service Limited (COSL, previously known as MIOS) is such a scheme. Brokers may continue advising in relation to mortgage loans with off-set accounts using the ‘no advice’ model without joining such a scheme.

Fire insurance and CCI insurance are regulated products.

Any type of financial investment will normally be a regulated financial product.

A person is not taken to provide financial advice if they:

(a) only express an opinion or recommendation about the allocation of a person’s funds amongst certain types of products; and

(b) do not express an opinion or recommendation as to a specific financial product or class of financial products

This is the so-called ‘no advice’ or ‘tick and flick’ exemption from the requirement to hold an AFS licence or be an authorised representative of an AFS licensee.

In summary there are three relevant exemptions for mortgage brokers:

no advice – tick and flick

class order in respect of offset accounts

brokers who are appointed insurance distributors - see below

insurance distributors

Class order 05/1070 - general insurance distributors - allows an insurer or AFS licensee who is authorised to deal in general insurance products to appoint a broker as an insurance distributor provided the broker is not already an authorised representative of that particular AFS licensee.

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The distributor must still not provide advice, and must only assist the customer to obtain the product, for example by filling out application forms and forwarding them to the insurer.

The class order relates to:

(a) general insurance which includes fire and contents insurance, motor vehicle insurance, consumer credit insurance (but not medical benefits insurance or life insurance); and

(b) bundled consumer credit insurance being CCI with a life insurance component

Although the AFS licensee does not need to comply with the requirements of appointing a person as an authorised representative, in order to benefit from the class order, the distributor must take reasonable steps to ensure retail clients are informed about:

the AFS licensee’s dispute resolution system

the fact that the distributor is acting on behalf of the AFS licensee; and

any remuneration to be received by the distributor

This information may be included in the AFS licensee’s Financial Services Guide (FSG) or it may be given to the retail client in a separate document.

In addition, as the AFS licensee is responsible for any distributors it appoints, the AFS licensee retains its responsibility to ensure that distributors are adequately trained and supervised and must take reasonable steps to ensure that distributors comply with financial services laws.

16.2 Benefits of CO 05/1070

There is no restriction on a distributor being appointed by more than one AFS licensee.

AFS licensees are not required to provide written notice to ASIC of the appointment or revocation of a distributor (as is the case when an authorised representative is appointed, removed, or changes its details).

Distributors may provide clients with the AFS licensee’s FSG. They are not required to personalise the FSG as is the case with authorised representatives.

A body corporate who has been appointed as a distributor may sub-authorise other distributors with the written consent of the AFS licensee.

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Part 17. Privacy Act Module

[LINK TO SEPARATE DOCUMENT]

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PART 18. Workplace Relations

[INSERT LINK]

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Part 19. Anti-Money Laundering / Counter Terrorism Financing Act

The Anti-Money Laundering / Counter Terrorism Financing Act (AML / CTF Act) commenced on 12 December 2006. It effectively replaced Australia’s previous money laundering regime in the Financial Transactions Reports Act (FTRA).

19.1 Scope of Act

The AML / CTF Act regulates reporting entities. Reporting entities are entities that provide a “designated service”. There are 71 designated services specified in the Act including 54 “financial services”.

The following industries are affected only when providing designated services.

Tranche 1 – effective 12 December 2006

ADIs

Lenders (where a trustee is the lender of record, the duties may be discharged by the master servicer or trust manager)

Issuers of securities or responsible entities of managed investment schemes

Bullion dealers

Gambling industry

Tranche 2 –commencement date TBA

Lawyers

Accountants

Real estate agents

Trustees

Professional directors/secretaries/agents (including those who provide registered office facilities)

The activities undertaken by brokers in “arranging a loan” are not designed services under the AML / CTF Act. However, brokers are often appointed as the agent of the lender to perform customer identification and due diligence activities.

19.2 Key requirements

If a business provides a designated service it must:

(a) consider whether it wants to become part of a designated business group

(b) identify its customers; The MFAA provides a sample identification form – see Part 10 Example Documents

(c) keep records (for seven years after the last provision of a designated service) of:

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(i) transactions - usually no more than ordinary record keeping of transactions

(ii) documents provided to the lender by customers (not including documents used in customer identification)

(iii) information used to verify customers (regardless of whether the loan proceeds or not)

(d) establish an AML / CTF Program (and keep a record of the AML / CTF Program for 7 years after the program is no longer in use)

(e) provide periodic reports ("Compliance Reports") to AUSTRAC regarding compliance with their AML / CTF Program

(f) advise AUSTRAC of any "suspicious transactions"

(g) provide details of all physical or "e-currency" transactions of $10,000 or more to AUSTRAC within ten business days

(h) undertake on-going customer due diligence ("know-your-customer" activities)

19.3 What must an AML / CTF Program contain?

An AML / CTF Program comprises two parts, as follows.

Part A – General – designed to identify, mitigate, and manage the risk that the provision of designated services might involve or facilitate money laundering or financing of terrorism. Part A must set out details of:

(a) procedures to identify risks (ie ongoing due diligence)

(b) risk awareness training programs

(c) employee due diligence programs

(d) oversight of the program

(e) the appointment of a compliance officer

(f) procedures for an independent review of the program (this may be internal or external)

Part B – Customer identification procedures, triggers for re-identification, and triggers for identification of pre-commencement customers.

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Part 20. ASIC’s regulation of debt collection

20.1 Background

ASIC regulates debt collection under the Australian Securities and Investments Commission Act 2001 (Cth), usually referred to as the ASIC Act, and the Trade Practices Act 1974 (Cth). The ASIC Act is most relevant to the collection of credit.

20.2 Prohibited conduct in respect of debt collection activity

A debt collector collecting debts relating to financial services (including credit) is prohibited from using conduct that involves undue harassment, physical force, coercion, conduct which is unconscionable, or misleading and deceptive in connection with the collection of debt – see s.12DJ, s.12DA and Part 2, Div 2, subdiv C, - ASIC Act.

20.3 Enforcement and remedies for breach of the ASIC Act

Breach of the harassment and coercion provisions is punishable on conviction by a fine of up to:

$220,000 (individual)

$1,100,000 (corporation).

These penalties also apply for a conviction of knowingly making false or misleading representations. (s.12GB ASIC Act).

Defences may be available in certain situations (s.12GI ASIC Act). These defences include situations where the breach occurred because of:

reasonable mistake;

reasonable reliance on information supplied by another person;

an act or default of another person and the breaching party took reasonable steps and exercised due diligence to avoid the contravention.

ASIC can also apply for civil orders against a debt collector, including injunctions against future conduct, non-punitive orders and punitive orders requiring adverse publicity.

20.4 ASIC Regulatory Guide 96

ASIC Regulatory Guide 96 dated October 2005 (RG96) sets out guidelines for debt collectors and creditors. Like all ASIC Regulatory Guides, RG96 is not legally binding, however, it provides an indication of the way in which ASIC intends to regulate the activities of debt collectors.

20.5 Reasonable purpose

Communications with the debtor must only be for a reasonable purpose and only if the debt collector or creditor has reasonable grounds to believe that the person being contacted is actually liable for the particular debt.

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RG96 cites the following examples as constituting a ‘reasonable purpose’ for contact:

give information about the debtor’s account

convey a demand for payment

explain the consequences of non-payment

make arrangements for repayment

review existing arrangements

enquire as to why communication attempts have been ignored

sight, inspect or recover a security interest.

Contact with the debtor should only be to the extent necessary and should occur at a reasonable time of the day or as otherwise agreed with the debtor.

The contact should not be excessive so as to avoid accusations of harassment. RG96 recommends that a debtor not be contacted more than 3 times a week, unless there is a legitimate reason for further contact.

The debt collector / creditor must also remember that it has privacy obligations to the debtor and third parties.

RG69 recommends that debt collectors / creditors keep proper written record of all communications with debtors, visits, file notes of telephone calls etc and records of payments already made. Further, RG69 recommends that creditors properly document settlements and keep credit reporting agencies up to date.

Undue harassment or coercion must be avoided. Justice Hill of the Federal Court has explained undue harassment as follows:

“peristent disturbance or torment…it can extend to cases where there are frequent unwelcome approaches requesting payment of a debt. However, such unwelcome approaches would not constitute undue harassment, at least where the demands made are legitimate and reasonably made. …... Where the frequency, nature or content of such communications is such that they are calculated to intimidate or demoralise, tire out or exhaust a debtor, rather than merely convey the demand for recovery, the conduct will constitute undue harassment. …..The reasonableness of the conduct will be relevant to whether what is harassment constitutes undue harassment”. ACCC v The Maritime Union of Australia [2001] FCA

20.6 Providing information to a debtor

Failure to provide information may constitute misleading or deceptive conduct or unconscionable conduct.

RG96 refers to the specific obligations imposed where a credit facility is regulated by the UCCC, including:

section 34 (statement of amount owing)

section 36 (disputed accounts)

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section 76 (statement of payout figure)

section 163 (copies of contracts and other documents).

20.7 Compliance

ASIC suggests that creditors and debt collectors need to:

maintain consistent procedures and practices

maintain evidence of consistent procedures and practices

better understand the laws which apply to debt collection so as to properly assess the manner taken to collect

implement internal processes to determine which statutory regimes apply to a particular debt

be careful about representations about the consequences of non-payment, legal action and procedure and the legal status of a debt.